SECOND DIVISION and not as a guarantor.
On petition for certiorari, the
[G.R. No. 113931. May 6, 1998.]
E. ZOBEL, INC., petitioner, vs. THE
COURT OF APPEALS,
CONSOLIDATED BANK AND TRUST
CORPORATION, and SPOUSES RAUL
AND ELEA R. CLAVERIA, respondents.
Herrera, Teehankee & Faylona for petitioner.
De los Reyes, Banaga, Briones & Associates for
private respondents.
SYNOPSIS
A complaint for sum of money with prayer for a writ of
preliminary attachment was led by respondent
SOLIDBANK against respondent spouses Raul and Elea
Claveria who failed to pay their loan which was secured
by a chattel mortgage and a Continuing Guaranty of
herein petitioner E. Zobel, Inc. which was also joined as
party-defendant. The petitioner moved to dismiss the
complaint contending that its liability was extinguished
pursuant to Article 2080 of the Civil Code considering
that it has lost its right to subrogate to the chattel
mortgage in view of the failure of SOLIDBANK to register
the chattel mortgage with the appropriate government
agency. The trial court in an order denied the said motion
on the ground that based on the provisions of the
document signed by the petitioner, it acted as a surety
Court of
Appeals affirmed the said order.
Hence, this petition for review.
The Court ruled that the contract executed by
petitioner in favor of SOLIDBANK, albeit denominated as
a "Continuing Guaranty," is a contract of surety. The terms
of the contract categorically obligates petitioner as
"surety" to induce SOLIDBANK to extend credit to
respondent spouses. Likewise, the contract clearly
disclose that petitioner assumed liability to SOLIDBANK,
as a regular party to the undertaking and obligated itself
as an original promissor. It bound itself jointly and
severally to the obligation with the respondent spouses. In
fact, SOLIDBANK need not resort to all other legal
remedies or exhaust respondent spouses' properties
before it can hold petitioner liable for the obligation. Thus,
having established that petitioner is a surety, Article 2080
of the Civil Code, relied upon by petitioner, nds no
application to the case at bar. In Bicol Savings and Loan
Association vs. Guinhawa, the Court ruled that Article
2080 of the New Civil Code does not apply where the
liability is as a surety, not as a guarantor.aSEHDA
SYLLABUS
CIVIL LAW; OBLIGATIONS AND CONTRACTS;
CONTRACT OF GUARANTY AND CONTRACT OF
SURETY; DISTINGUISHED. — A contract of surety is an
accessory promise by which a person binds himself for
another already bound, and agrees with the creditor to
satisfy the obligation if the debtor does not. A contract of
guaranty, on the other hand, is a collateral undertaking to
pay the debt of another in case the latter does not pay the
debt. Strictly speaking, guaranty and surety are nearly
related, and many of the principles are common to both.
However, under our civil law, they may be distinguished
thus: A surety is usually bound with his principal by the
same instrument, executed at the same time, and on the
same consideration. He is an original promissor and
debtor from the beginning, and is held, ordinarily, to know
every default of his principal. Usually, he will not be
discharged, either by the mere indulgence of the creditor
to the principal, or by want of notice of the default of the
principal, no matter how much he may be injured thereby.
On the other hand, the contract of guaranty is the
guarantor's own separate undertaking, in which the
principal does not join. It is usually entered into before or
after that of the principal, and is often supported on a
separate consideration from that supporting the contract
of the principal. The original contract of his principal is not
his contract, and he is not bound to take notice of its non-
performance. He is often discharged by the mere
indulgence of the creditor to the principal, and is usually
not liable unless noti ed of the default of the principal.
Simply put, a surety is distinguished from a guaranty in
that a guarantor is the insurer of the solvency of the debtor
and thus binds himself to pay if the principal is unable to
pay while a surety is the insurer of the debt, and he
obligates himself to pay if the principal does not pay.
2. ID.; ID.; CONTRACT OF SURETY; CASE
AT BAR. — Based on the aforementioned de nitions, it
appears that the contract executed by petitioner in favor
of SOLIDBANK, albeit denominated as a "Continuing
Guaranty," is a contract of surety. The terms of the
contract categorically obligates petitioner as "surety" to
induce SOLIDBANK to extend credit to respondent
spouses. The contract clearly disclose that petitioner
assumed liability to SOLIDBANK, as a regular party to the
undertaking and obligated itself as an original promissor.
It bound itself jointly and severally to the obligation with
the respondent spouses. In fact, SOLIDBANK need not
resort to all other legal remedies or exhaust respondent
spouses' properties before it can hold petitioner liable for
the obligation.SCADIT
3. ID.; ID.; ID.; THE USE OF THE TERM
"GUARANTEE" DOES NOT IPSO FACTO MEAN THAT
THE CONTRACT IS ONE OF GUARANTY. — The use of
the term "guarantee" does not ipso facto mean that the
contract is one of guaranty. Authorities recognize that the
word "guarantee" is frequently employed in business
transactions to describe not the security of the debt but an
intention to be bound by a primary or independent
obligation. As aptly observed by the trial court, the
interpretation of a contract is not limited to the title alone
but to the contents and intention of the parties.
4. ID.; ID.; ARTICLE 2080 OF THE CIVIL
CODE NOT APPLICABLE. — Having thus established
that petitioner is a surety, Article 2080 of the Civil Code,
relied upon by petitioner, nds no application to the case at
bar. In Bicol Savings and Loan Saving Association vs.
Guinhawa, we have ruled that Article 2080 of the New
Civil Code does not apply where the liability is as a surety,
not as a guarantor.
5. ID.; ID.; PETITIONER NOT RELEASED
FROM OBLIGATION; CASE AT BAR. — But even
assuming that Article 2080 is applicable, SOLIDBANK's
failure to register the chattel mortgage did not release
petitioner from the obligation. In the Continuing Guaranty
executed in favor of SOLIDBANK, petitioner bound itself
to the contract irrespective of the existence of any
collateral. It even released SOLIDBANK from any fault or
negligence that may impair the contract. cHCIDE
DECISION
MARTINEZ, J : p
This petition for review on certiorari seeks the
reversal of the decision 1 of the Court of Appeals dated
July 13, 1993 which a rmed the Order of the Regional Trial
Court of Manila, Branch 51, denying petitioner's Motion to
Dismiss the complaint, as well as the Resolution 2 dated
February 15, 1994 denying the motion for reconsideration
thereto.cdasia
The facts are as follows:
Respondent spouses Raul and Elea Claveria,
doing business under the name "Agro Brokers," applied
for a loan with respondent Consolidated Bank and Trust
Corporation (now SOLIDBANK) in the amount of Two
Million Eight Hundred Seventy Five Thousand Pesos
(P2,875,000.00) to nance the purchase of two (2)
maritime barges and one tugboat 3 which would be used
in their molasses business. The loan was granted subject
to the condition that respondent spouses execute a chattel
mortgage over the three (3) vessels to be acquired and
that a continuing guarantee be executed by Ayala
International Philippines, Inc., now herein petitioner E.
Zobel, Inc., in favor of SOLIDBANK. The respondent
spouses agreed to the arrangement. Consequently, a
chattel mortgage and a Continuing Guaranty 4 were
executed.
Respondent spouses defaulted in the payment of
the entire obligation upon maturity. Hence, on January 31,
1991, SOLIDBANK led a complaint for sum of money with
a prayer for a writ of preliminary attachment, against
respondents spouses and petitioner. The case was
docketed as Civil Case No. 91-55909 in the Regional Trial
Court of Manila.
Petitioner moved to dismiss the complaint on the
ground that its liability as guarantor of the loan was
extinguished pursuant to Article 2080 of the Civil Code of
the Philippines. It argued that it has lost its right to be
subrogated to the rst chattel mortgage in view of
SOLIDBANK's failure to register the chattel mortgage with
the appropriate government agency.
SOLIDBANK opposed the motion contending that
Article 2080 is not applicable because petitioner is not a
guarantor but a surety.
On February 18, 1993, the trial court issued an
Order, portions of which reads:
"After a careful consideration of the
matter on hand, the Court nds the ground of
the motion to dismiss without merit. The
document referred to as 'Continuing
Guaranty' dated August 21, 1985 (Exh. 7)
states as follows:
'For and in consideration of any
existing indebtedness to you of Agro
Brokers, a single proprietorship
owned by Mr. Raul Claveria for the
 payment of which the undersigned is
now obligated to you as surety and in
order to induce you, in your discretion,
at any other manner, to, or at the
request or for the account of the
borrower, . . . '
"The provisions of the document are clear,
plain and explicit.
"Clearly therefore, defendant E. Zobel, Inc.
signed as surety. Even though the title of the
document is 'Continuing Guaranty', the Court's
interpretation is not limited to the title alone but
to the contents and intention of the parties
more speci cally if the language is clear and
positive. The obligation of the defendant Zobel
being that of a surety, Art. 2080 New Civil
Code will not apply as it is only for those acting
as guarantor. In fact, in the letter of January 31,
1986 of the defendants (spouses and Zobel) to
the plaintiff it is requesting that the chattel
mortgage on the vessels and tugboat be
waived and/or rescinded by the bank
inasmuch as the said loan is covered by the
Continuing Guaranty by Zobel in favor of the
plaintiff thus thwarting the claim of the
defendant now that the chattel mortgage is
an essential condition of the guaranty. In its
letter, it said that because of the Continuing
Guaranty in favor of the plaintiff the chattel
mortgage is rendered unnecessary and
redundant.
"With regard to the claim that the
failure of the plaintiff to register the chattel
mortgage with the proper government
agency, i.e. with the O ce of the Collector of
Customs or with the Register of Deeds
makes the obligation a guaranty, the same
merits a scant consideration and could not
be taken by this Court as the basis of the
extinguishment of the obligation of the
defendant corporation to the plaintiff as
surety. The chattel mortgage is an additional
security and should not be considered as
payment of the debt in case of failure of
payment. The same is true with the failure to
register, extinction of the liability would not
lie.
"WHEREFORE, the Motion to
Dismiss is hereby denied and defendant E.
Zobel, Inc., is ordered to le its answer to the
complaint within ten (10) days from receipt of
a copy of this Order." 5
Petitioner moved for reconsideration but was
denied on April 26, 1993. 6
Thereafter, petitioner questioned said Orders
before the respondent Court of Appeals, through a petition
for certiorari, alleging that the trial court committed grave
abuse of discretion in denying the motion to dismiss.
On July 13, 1993, the Court of Appeals rendered
the assailed decision the dispositive portion of which
reads:
"WHEREFORE, nding that
respondent Judge has not committed any
grave abuse of discretion in issuing the
herein assailed orders, We hereby DISMISS
the petition."
 A motion for reconsideration led by petitioner was
denied for lack of merit on February 15, 1994.
Petitioner now comes to us via this petition arguing
that the respondent Court of Appeals erred in its nding: (1)
that Article 2080 of the New Civil Code which provides:
"The guarantors, even though they be solidary, are
released from their obligation whenever by some act of
the creditor they cannot be subrogated to the rights,
mortgages, and preferences of the latter," is not
applicable to petitioner; (2) that petitioner's obligation to
respondent SOLIDBANK under the continuing guaranty is
that of a surety; and (3) that the failure of respondent
SOLIDBANK to register the chattel mortgage did not
extinguish petitioner's liability to respondent SOLIDBANK.
We shall rst resolve the issue of whether or not
petitioner under the "Continuing Guaranty" obligated itself
to SOLIDBANK as a guarantor or a surety.
A contract of surety is an accessory promise by
which a person binds himself for another already bound,
and agrees with the creditor to satisfy the obligation if the
debtor does not. 7 A contract of guaranty, on the other
hand, is a collateral undertaking to pay the debt of another
in case the latter does not pay the debt. 8
Strictly speaking, guaranty and surety are nearly related,
and many of the principles are common to both. However,
under our civil law, they may be distinguished thus: A surety
is usually bound with his principal by the same instrument,
executed at the same time, and on the same
consideration. He is an original promissor and debtor from
the beginning, and is held, ordinarily, to know every
default of his principal. Usually, he will not be discharged,
either by the mere indulgence of the creditor to the
principal, or by want of notice of the default of the principal,
no matter how much he may be injured thereby. On the
other hand, the contract of guaranty is the guarantor's own
separate undertaking, in which the principal does not join.
It is usually entered into before or after that of the principal,
and is often supported on a separate consideration from
that supporting the contract of the principal. The original
contract of his principal is not his contract, and he is not
bound to take notice of its non-performance. He is often
discharged by the mere indulgence of the creditor to the
principal, and is usually not liable unless notified of the
default of the principals. 9
Simply put, a surety is distinguished from a
guaranty in that a guarantor is the insurer of the solvency
of the debtor and thus binds himself to pay if the principal
is unable to pay while a surety is the insurer of the debt,
and he obligates himself to pay if the principal does not
pay. 10
Based on the aforementioned de nitions, it appears
that the contract executed by petitioner in favor of
SOLIDBANK, albeit denominated as a "Continuing
Guaranty," is a contract of surety. The terms of the
contract categorically obligates petitioner as "surety" to
induce SOLIDBANK to extend credit to respondent
spouses. This can be seen in the following stipulations.
"For and in consideration of any existing
indebtedness to you of AGRO BROKERS, a
single proprietorship owned by MR. RAUL P.
CLAVERIA, of legal age, married and with
business address . . . (hereinafter called the
Borrower), for the payment of which the
undersigned is now obligated to you as surety
and in order to induce you, in your discretion,
at any time or from time to time hereafter, to
make loans or advances or to extend credit in
any other manner to, or at the request or for
the account of the Borrower, either with or
without purchase or discount, or to make any
loans or advances evidenced or secured by
any notes, bills receivable, drafts,
acceptances, checks or other instruments or
evidences of indebtedness . . . upon which the
Borrower is or may become liable as maker,
endorser, acceptor, or otherwise, the
undersigned agrees to guarantee, and does
hereby guarantee, the punctual payment, at
maturity or upon demand, to you of any and all
such instruments, loans, advances, credits
and/or other obligations herein before referred
to, and also any and all other indebtedness of
every kind which is now or may hereafter
become due or owing to you by the Borrower,
together with any and all expenses which may
be incurred by you in collecting all or any such
instruments or other indebtedness or
obligations hereinbefore referred to, and or in
enforcing any rights hereunder, and also to
make or cause any and all such payments to
be made strictly in accordance with the terms
and provisions of any agreement (g), express
or implied, which has (have) been or may
hereafter be made or entered into by the
Borrower in reference thereto, regardless of
any law, regulation or decree, now or hereafter
in effect which might in any manner affect any
of the terms or provisions of any such
agreements(s) or your right with respect
thereto as against the Borrower, or cause or
permit to be invoked any alteration in the time,
amount or manner of payment by the Borrower
of any such instruments, obligations or
indebtedness; . . . " (Emphasis Supplied)
cdasia
One need not look too deeply at the contract to determine
the nature of the undertaking and the intention of the
parties. The contract clearly disclose that petitioner
assumed liability to SOLIDBANK, as a regular party to the
undertaking and obligated itself as an original promissor.
It bound itself jointly and severally to the obligation with
the respondent spouses. In fact, SOLIDBANK need not
resort to all other legal remedies or exhaust respondent
spouses' properties before it can hold petitioner liable for
the obligation. This can be gleaned from a reading of the
stipulations in the contract, to wit:
' . . . If default be made in the payment
of any of the instruments, indebtedness or
other obligation hereby guaranteed by the
undersigned, or if the Borrower, or the
undersigned should die, dissolve, fail in
business, or become insolvent, . . , or if any
funds or other property of the Borrower, or of
the undersigned which may be or come into
your possession or control or that of any third
party acting in your behalf as aforesaid should
be attached of distrained, or should be or
become subject to any mandatory order of
court or other legal process, then, or any time
after the happening of any such event any or
all of the instruments of indebtedness or other
obligations hereby guaranteed shall, at your
option become (for the purpose of this
guaranty) due and payable by the undersigned
forthwith without demand of notice, and full
power and authority are hereby given you, in
your discretion, to sell, assign and deliver all or
any part of the property upon which you may
then have a lien hereunder at any broker's
board, or at public or private sale at your
option, either for cash or for credit or for future
delivery without assumption by you of credit
risk, and without either the demand,
advertisement or notice of any kind, all of
which are hereby expressly waived. At any
sale hereunder, you may, at your option,
purchase the whole or any part of the property
so sold, free from any right of redemption on
the part of the undersigned, all such rights
being also hereby waived and released. In
case of any sale and other disposition of any
of the property aforesaid, after deducting all
costs and expenses of every kind for care,
safekeeping, collection, sale, delivery or
otherwise, you may apply the residue of the
proceeds of the sale and other disposition
thereof, to the payment or reduction, either in
whole or in part, of any one or more of the
obligations or liabilities hereunder of the
undersigned whether or not except for
disagreement such liabilities or obligations
would then be due, making proper allowance
or interest on the obligations and liabilities not
otherwise then due, and returning the
overplus, if any, to the undersigned; all without
prejudice to your rights as against the
undersigned with respect to any and all
amounts which may be or remain unpaid on
any of the obligations or liabilities aforesaid at
any time(s)"
xxx xxx xxx
'Should the Borrower at this or at any future
time furnish, or should be heretofore have
furnished, another surety or sureties to
guarantee the payment of his obligations to
you, the undersigned hereby expressly
waives all bene ts to which the undersigned
might be entitled under the provisions of
Article 1837 of the Civil Code (bene cio
division), the liability of the undersigned
under any and all circumstances being joint
and several;" (Emphasis Ours)
The use of the term "guarantee" does not ipso facto
mean that the contract is one of guaranty. Authorities
recognize that the word "guarantee" is frequently
employed in business transactions to describe not the
security of the debt but an intention to be bound by a
primary or independent obligation. 11 As aptly observed by
the trial court, the interpretation of a contract is not limited
to the title alone but to the contents and intention of the
parties.
Having thus established that petitioner is a surety, Article
2080 of the Civil Code, relied upon by petitioner, nds no
application to the case at bar. In Bicol Savings and Loan
Association vs. Guinhawa, 12 we have ruled that Article
2080 of the New Civil Code does not apply where the
liability is as a surety, not as a guarantor.
But even assuming that Article 2080 is applicable,
SOLIDBANK's failure to register the chattel mortgage did
not release petitioner from the obligation. In the
Continuing Guaranty executed in favor of SOLIDBANK,
petitioner bound itself to the contract irrespective of the
existence of any collateral. It even released SOLIDBANK
from any fault or negligence that may impair the contract.
The pertinent portions of the contract so provides:
" . . . the undersigned (petitioner) who
hereby agrees to be and remain bound upon
this guaranty, irrespective of the existence,
value or condition of any collateral, and
notwithstanding any such change,
In ne, we nd the petition to be without merit as no
reversible error was committed by respondent Court of
Appeals in rendering the assailed decision.
WHEREFORE, the decision of the respondent Court
of Appeals is hereby AFFIRMED.
Costs against the petitioner.
SO ORDERED. cdasia

exchange, settlement, compromise,

surrender, release, sale, application, Regalado, Melo and Puno, JJ ., concur.
renewal or extension, and notwithstanding
also that all obligations of the Borrower to
you outstanding and unpaid at any time(s)
may exceed the aggregate principal sum
herein above prescribed.
'This is a Continuing Guaranty and
shall remain in full force and effect until
written notice shall have been received by
you that it has been revoked by the
undersigned, but any such notice shall not be
released the undersigned from any liability
as to any instruments, loans, advances or
other obligations hereby guaranteed, which
may be held by you, or in which you may
have any interest, at the time of the receipt
or such notice. No act or omission of any kind
on your part in the premises shall in any
event affect or impair this guaranty, nor shall
same be affected by any change which may
arise by reason of the death of the
undersigned, of any partner(s) of the
undersigned, or of the Borrower, or of the
accession to any such partnership of any one
or more new partners." (Emphasis supplied)
 FIRST DIVISION
[G.R. No. 142381. October 15, 2003.]
PHILIPPINE BLOOMING MILLS,
INC., and ALFREDO CHING,
petitioners, vs. COURT OF
APPEALS and TRADERS ROYAL
BANK, respondents.
Balgos and Perez for petitioners.
Gonzales, Sinense & Jimenez for private
respondent.
SYNOPSIS
The Court of Appeals a rmed with modi cation the
Decision rendered by Branch 113 of the Regional Trial
Court of Pasay City declaring petitioner Alfredo Ching
liable to respondent Traders Royal Bank (TRB) for the
payment of the credit accommodations extended to
Philippine Blooming Mills, Inc. According to the trial court,
the liability of Ching as a surety attaches independently
from his capacity as a stockholder of the Philippine
Blooming Mills. Under the Deed of Suretyship, petitioner
Ching unconditionally agreed to assume PBM's liability to
respondent bank in the event PBM defaulted in the
payment of the said obligation in addition to whatever
penalties, expenses and bank charges that may occur by
reason of default. The appellate court a rmed with modi
cation the judgment of the trial court. The modi cation is
with respect to the amount of liability of petitioner Alfredo
Ching which is lowered from P19,333,558.16 to
P15,773,708.78 with legal interest of 12% per annum until
it is fully paid. Petitioner Ching asserted before the Court
that the Deed of Suretyship dated 21 July 1977 could not
answer for obligations not yet in existence at the time of
its execution. Speci cally, Ching maintained that the Deed
of Suretyship could not answer for debts contracted by
PBM in 1980 and 1981. AHCaED
The Supreme Court a rmed the judgment of the
Court of Appeals. According to the Court, petitioner Ching
is liable for credit obligations contracted by PBM against
TRB before and after the execution of the 21 July 1977
Deed of Suretyship. It is evident from the tenor of the deed
itself, referring to amounts PBM "may now be indebted or
may hereafter become indebted" to TRB. Article 2053 of
the Civil Code expressly allows a suretyship for "future
debts." The Court also ruled that petitioner Ching is liable
for the amounts stated in the letters of credit covered by
the trust receipts. Petitioner Ching executed, on behalf of
PBM, separate Undertakings for each trust receipt
expressly granting to TRB the right to take possession of
the goods at any time to protect TRB's interests. TRB may
exercise such right without waiving its right to collect the
full amount of the loan to PBM. The Undertakings also
provide that any suspension of payment or any
assignment by PBM for the benefit of creditors renders the
loan due and demandable. HESAIT
SYLLABUS
CIVIL LAW; GUARANTY; EXTENT OF GUARANTY;
RESPONDENT IS LIABLE FOR CREDIT OBLIGATIONS
CONTRACTED AFTER THE EXECUTION OF THE DEED
OF SURETYSHIP; IT IS EVIDENT FROM THE TENOR OF
THE DEED ITSELF, REFERRING TO AMOUNTS
PETITIONER "MAY NOW BE INDEBTED OR MAY
HEREAFTER BECOME INDEBTED TO." — Ching is liable
for credit obligations contracted by PBM against TRB before
and after the execution of the 21 July 1977 Deed of
Suretyship. This is evident from the tenor of the deed
itself, referring to amounts PBM "may now be indebted or
may hereafter become indebted" to TRB. The law
expressly allows a "suretyship for future debts". Article
2053 of the Civil Code provides: A guaranty may also be
given as security for future debts, the amount of which is
not yet known; there can be no claim against the
guarantor until the debt is liquidated. A conditional
obligation may also be secure. AaECSH
2. ID.; OBLIGATIONS; JOINT AND
SOLIDARY OBLIGATIONS; AS CREDITOR,
RESPONDENT BANK HAS THE RIGHT UNDER THE
SURETY TO PROCEED AGAINST RESPONDENT FOR
THE ENTIRE AMOUNT OF PETITIONER'S LOAN. — In
granting the loan to PBM, TRB required Ching's surety
precisely to insure full recovery of the loan in case PBM
becomes insolvent or fails to pay in full. This was the very
purpose of the surety. Thus, Ching cannot use PBM's
failure to pay in full as justi cation for his own reduced
liability to TRB. As surely, Ching agreed to pay in full
PBM's loan in case PBM fails to pay in full for any reason,
including its insolvency. TRB, as creditor, has the right
under the surety to proceed against Ching for the entire
amount of PBM's loan. This is clear from Article 1216 of
the Civil Code: ART. 1216. The creditor may proceed
against any one of the solidary debtors or some or all of
them simultaneously. The demand made against one of
them shall not be an obstacle to those which may
subsequently be directed against the others, so long as
the debt has not been fully collected. cdasiajur
3. ID.; RESPONDENT IS LIABLE FOR THE
AMOUNTS STATED IN THE LETTERS OF CREDIT
COVERED BY THE TRUST RECEIPTS. — Ching is still
liable for the amounts stated in the letters of credit covered
by the trust receipts. Other than his bare allegations, Ching
has not shown proof of payment or settlement with TRB.
Atty. Vicente Aranda, TRB's corporate secretary and First
Vice President of its Human Resource Management
Department, testi ed that the conditions in the TRB board
resolution presented by Ching were not met or implemented.
Ching also claims that TRB prevented PBM from ful lling its
obligations under the trust receipts when TRB, together with
other creditor banks, took hold of PBM's inventories,
including the goods covered by the trust receipts. Ching
asserts that this act of TRB released him from liability under
the suretyship. Ching forgets that he executed, on behalf of
PBM, separate Undertakings for each trust receipt expressly
granting to TRB the right to take possession of the goods at
any time to protect TRB's interests. TRB may exercise such
right without waiving its right to collect the full amount of the
loan to PBM. The Undertakings also provide that any
suspension of payment or any assignment by PBM for the
bene t of creditors renders the loan due and demandable.
Presidential Decree No. 115 ("PD No. 115"), otherwise
known as the Trust Receipts Law, expressly allows TRB to
take possession of the goods covered by the trust receipts.
Thus, even though TRB took possession of the goods
covered by the trust receipts, PBM and Ching remained
liable for the entire amount of the loans covered by the trust
receipts. ETDHaC
 DECISION Ching was the Senior Vice President of PBM. In his
personal capacity and not as a corporate o cer, Ching
signed a Deed of Suretyship dated 21 July 1977 binding
CARPIO, J : p
himself as follows:
The Case . . . as primary obligor(s) and not as
mere guarantor(s), hereby warrant to the
This is a petition for review on certiorari 1 to annul the TRADERS ROYAL BANK, its successors
Decision 2 dated 16 July 1999 of the Court of Appeals in and assigns, the due and punctual payment
CA-G.R. CV No. 39690, as well as its Resolution dated 17 by the following individuals and/or
February 2000 denying the motion for reconsideration. companies/ rms, hereinafter called the
The Court of Appeals affirmed with modi cation the DEBTOR(S), of such amounts whether due
Decision 3 dated 31 August 1992 rendered by Branch 113 or not, as indicated opposite their respective
of the Regional Trial Court of Pasay City ("trial court") . names, to wit:
The trial court's Decision declared petitioner Alfredo Ching NAME OF DEBTOR(S)
("Ching") liable to respondent Traders Royal Bank ("TRB") AMOUN
for the payment of the credit accommodations extended T OF OBLIGATION
to Philippine Blooming Mills, Inc. ("PBM").
PHIL. BLOOMING MILLS CORP. TEN
Antecedent Facts MILLION PESOS
(P
This case stems from an action to compel Ching to 10,
pay TRB the following amounts: 00
0,0
1. P959,611.96 under Letter of Credit
00.
No. 479 AD covered by Trust 00
Receipt No. 106; 4 )
2. P1,191,137.13 under Letter of owing to said TRADERS ROYAL BANK,
Credit No. 563 AD covered by Trust hereafter called the CREDITOR, as evidenced
Receipt No. 113; 5 and by all notes, drafts, overdrafts and other credit
obligations of every kind and nature
3. P3,500,000 under the trust loan
contracted/incurred by said DEBTOR(S) in favor
covered by a notarized Promissory of said CREDITOR.
Note. 6
 In case of default by any and/or all the
DEBTOR(S) to pay the whole or part of said
indebtedness herein secured at maturity, I/We,
jointly and severally, agree and engage to the
CREDITOR, its successors and assigns, the
prompt payment, without demand or notice
from said CREDITOR, of such notes, drafts,
overdrafts and other credit obligations on
which the DEBTOR(S) may now be indebted
or may hereafter become indebted to the
CREDITOR, together with all interests, penalty
and other bank charges as may accrue
thereon and all expenses which may be
incurred by the latter in collecting any or all
such instruments.
I/WE further warrant the due and
faithful performance by the DEBTOR(S) of all
the obligations to be performed under any
contracts, evidencing
indebtedness/obligations and any
supplements, amendments, charges or modi
cations made thereto, including but not
limited to, the due and punctual payment by
the said DEBTOR(S).
I/WE hereby expressly waive notice of
acceptance of this suretyship, and also
presentment, demand, protest and notice of
dishonor of any and all such instruments, loans,
advances, credits, or other indebtedness or
obligations hereinbefore referred to.
MY/OUR liability on this Deed of
Suretyship shall be solidary, direct and
immediate and not contingent upon the
pursuit by the CREDITOR, its successors or
assigns, of whatever remedies it or they
possess; and I/WE hereby agree to be and
remain bound upon this suretyship,
irrespective of the existence, value or
condition of any collateral, notwithstanding
also that all obligations of the DEBTOR(S) to
you outstanding and unpaid at any time may
exceed the aggregate principal sum herein
above stated.
In the event of judicial proceedings,
I/WE hereby expressly agree to pay the
creditor for and as attorney's fees a sum
equivalent to TEN PERCENT (10%) of the
total indebtedness (principal and interest)
then unpaid, exclusive of all costs or
expenses for collection allowed by law. 7
(Emphasis supplied)
On 24 March and 6 August 1980, TRB granted
PBM letters of credit on application of Ching in his
capacity as Senior Vice President of PBM. Ching later
accomplished and delivered to TRB trust receipts, which
acknowledged receipt in trust for TRB of the merchandise
subject of the letters of credit. Under the trust receipts,
PBM had the right to sell the merchandise for cash with
the obligation to turn over the entire proceeds of the sale
to TRB as payment of PBM's indebtedness. Letter of
Credit No. 479 AD, covered by Trust Receipt No. 106, has
a face value of US$591,043, while Letter of Credit No. 563
AD, covered by Trust Receipt No. 113, has a face value
of US$155,460.34.
Ching further executed an Undertaking for each
trust receipt, which uniformly provided that:

xxx xxx xxx
6. All obligations of the undersigned
under the agreement of trusts shall
bear interest at the rate of _____ per
centum (___%) per annum from the
date due until paid.
7. [I]n consideration of the Trust Receipt,
the undersigned hereby jointly and
severally undertake and agree to pay
on demand on the said BANK, all sums
and amounts of money which said
BANK may call upon them to pay arising
out of, pertaining to, and/or in any
manner connected with this receipt. In
case it is necessary to collect the draft
covered by the Trust Receipt by or
through an attorney-at-law, the
undersigned hereby further agree(s) to
pay an additional of 10% of the total
mount due on the draft as attorney's
fees, exclusive of all costs, fees and
other expenses of collection but shall in
no case be less than P200.00" 8
(Emphasis supplied)
On 27 April 1981, PBM obtained a P3,500,000 trust
loan from TRB. Ching signed as co-maker in the notarized
Promissory Note evidencing this trust loan. The
Promissory Note reads:
FOR VALUE RECEIVED THIRTY (30)
DAYS after date, I/We, jointly and severally,
promise to pay the TRADERS ROYAL BANK or
order, at its O ce in 4th Floor, Kanlaon Towers
Bldg., Roxas Blvd., Pasay City, the sum of
Pesos THREE MILLION FIVE HUNDRED
THOUSAND ONLY (P3,500,000.00), Philippine
Currency, with the interest rate of Eighteen
Percent (18%) per annum until fully paid.
In case of non-payment of this note at maturity,
I/We, jointly and severally agree to pay an
additional amount equivalent to two per cent
(2%) of the principal sum per annum, as
penalty and collection charges in the form of
liquidated damages until fully paid, and the
further sum of ten percent (10%) thereof in
full, without any deduction, as and for
attorney' fees whether actually incurred or
not, exclusive of costs and other
judicial/extrajudicial expenses; moreover,
I/We jointly and severally, further empower
and authorize the TRADERS ROYAL BANK
at its option, and without notice to set off or
to apply to the payment of this note any and
all funds, which may be in its hands on
deposit or otherwise belonging to anyone or
all of us, and to hold as security therefor any
real or personal property which may be in its
possession or control by virtue of any other
contract. 9 (Emphasis supplied)
PBM defaulted in its payment of Trust Receipt No.
106 (Letter of Credit No. 479 AD) for P959,611.96, and of
Trust Receipt No. 113 (Letter of Credit No. 563 AD) for
P1,191,137.13. PBM also defaulted on its P3,500,000
trust loan.
On 1 April 1982, PBM and Ching led a petition for
suspension of payments with the Securities and
Exchange Commission ("SEC"), docketed as SEC Case
No. 2250. 10 The petition sought to suspend payment of
PBM's obligations and prayed that the SEC allow PBM to
continue its normal business operations free from the
interference of its creditors. One of the listed creditors of
PBM was TRB. 11
On 9 July 1982, the SEC placed all of PBM's
assets, liabilities, and obligations under the rehabilitation
receivership of Kalaw, Escaler and Associates. 12
On 13 May 1983, ten months after the SEC placed
PBM under rehabilitation receivership, TRB led with the
trial court a complaint for collection against PBM and
Ching. TRB asked the trial court to order defendants to
pay solidarily the following amounts:
(1) P6,612,132.74 exclusive of interests,
penalties, and bank charges
[representing its indebtedness arising
from the letters of credit issued to its
various suppliers];
(2) P4,831,361.11, exclusive of interests,
penalties, and other bank charges
[due and owing from the trust loan of
27 April 1981 evidenced by a
promissory note];
(3) P783,300.00 exclusive of interests,
penalties, and other bank charges
[due and owing from the money
market loan of 1 April 1981 evidenced
by a promissory note];
(4) To order defendant Ching to pay
P10,000,000.00 under the Deed of
Suretyship in the event plaintiff can
not recover the full amount of PBM's
indebtedness from the latter;
(5) The sum equivalent to 10% of the
total sum due as and for attorney's
fees;
(6) Such other amounts that may be
proven by the plaintiff during the trial,
by way of damages and expenses for
litigation. 13
On 25 May 1983, TRB moved to withdraw the
complaint against PBM on the ground that the SEC had
already placed PBM under receivership. 14 The trial court
thus dismissed the complaint against PBM. 15
On 23 June 1983, PBM and Ching also moved to
dismiss the complaint on the ground that the trial court
had no jurisdiction over the subject matter of the case.
PBM and Ching invoked the assumption of jurisdiction
by the SEC over all of PBM's assets and liabilities. 16
TRB led an opposition to the Motion to Dismiss.
TRB argued that (1) Ching is being sued in his personal
capacity as a surety for PBM; (2) the SEC decision
declaring PBM in suspension of payments is not binding
on TRB; and (3) Presidential Decree No. 1758 ("PD No.
1758"), 17 which Ching relied on to support his assertion
that all claims against PBM are suspended, does not
apply to Ching as the decree regulates corporate activities
only.
18
In its order dated 15 August 1983, 19 the trial court
denied the motion to dismiss with respect to Ching and a
rmed its dismissal of the case with respect to PBM. The
trial court stressed that TRB was holding Ching liable
under the Deed of Suretyship. As Ching's obligation was
solidary, the trial court ruled that TRB could proceed
against Ching as surety upon default of the principal
debtor PBM. The trial court also held that PD No. 1758
applied only to corporations, partnership and associations
and not to individuals.
Upon the trial court's denial of his Motion for
Reconsideration, Ching led a Petition for Certiorari and
Prohibition 20 before the Court of Appeals. The appellate
court granted Ching's petition and ordered the dismissal
of the case. The appellate court ruled that the SEC
assumed jurisdiction over Ching and PBM to the exclusion
of courts or tribunals of coordinate rank.
TRB assailed the Court of Appeals' Decision 21
before this Court. In Traders Royal Bank v. Court of
Appeals, 22 this Court upheld TRB and ruled that Ching
was merely a nominal party in SEC Case No. 2250.
Creditors may sue individual sureties of debtor
corporations, like Ching, in a separate proceeding before
regular courts despite the pendency of a case before the
SEC involving the debtor corporation.
In his Answer dated 6 November 1989, Ching
denied liability as surety and accommodation co-maker of
PBM. He claimed that the SEC had already issued a
decision
23 approving a revised rehabilitation plan for PBM's
creditors, and that PBM obtained the credit
accommodations for corporate purposes that did not
redound to his personal bene t. He further claimed that
even as a surety, he has the right to the defenses personal
to PBM. Thus, his liability as surety would attach only if,
after the implementation of payments scheduled under the
rehabilitation plan, there would remain a balance of PBM's
debt to TRB. 24 Although Ching admitted PBM's availment
of the credit accommodations, he did not show any proof
of payment by PBM or by him.
TRB admitted certain partial payments on the PBM
account made by PBM itself and by the SEC-appointed
receiver. 25 Thus, the trial court had to resolve the
following remaining issues:
1. How much exactly is the corporate
defendant's outstanding obligation to
the plaintiff?
2. Is defendant Alfredo Ching personally
answerable, and for exactly how
much? 26
TRB presented Mr. Lauro Francisco, loan o cer of
the Remedial Management Department of TRB, and Ms.
Carla Pecson, manager of the International Department of
TRB, as witnesses. Both witnesses testified to the
following:
1. The existence of a Deed of Suretyship dated 21 July
1977 executed by Ching for PBM's liabilities to TRB up
to P10,000,000; 27
2. The application of PBM and grant by
TRB on 13 March 1980 of Letter of
Credit No. 479 AD for US$591,043,
and the actual availment by PBM of
the full proceeds of the credit
accommodation; 28
3. The application of PBM and grant by
TRB on 6 August 1980 of Letter of
 Credit No. 563 AD for US$156,000,
and the actual availment by PBM of
the full proceeds of the credit
accommodation; 29 and
4. The existence of a trust loan of
P3,500,000 evidenced by a notarized
Promissory Note dated 27 April 1981
wherein Ching bound himself
solidarily with PBM; 30 and
5. Per TRB's computation, Ching is
liable for P19,333,558.16 as of 31
October 1991. 31
Ching presented Atty. Vicente Aranda, corporate
secretary and First Vice President of Human Resources
Department of TRB, as witness. Ching sought to establish
that TRB's Board of Directors adopted a resolution xing
the PBM account at an amount lower than what TRB
wanted to collect from Ching. The trial court allowed Atty.
Aranda to testify over TRB's manifestation that the
Answer failed to plead the subject matter of his testimony.
Atty. Aranda produced TRB Board Resolution No. 5935,
series of 1990, which contained the minutes of the special
meeting of TRB's Board of Directors held on 8 June 1990.
32 In the resolution, the Board of Directors advised TRB's
Management "not to release Alfredo Ching from his JSS
liability to the bank." 33 The resolution also stated the
following:
a) Accept the P1.373 million deposits
remitted over a period of 17 years or
until 2006 which shall be applied
directly to the account (as remitted per
hereto attached schedule). The
amount of P1.373 million shall be
considered as full payment of PBM's
account. (The receiver is amenable to
this alternative)
The initial deposit/remittance which
amounts to P150,000.00 shall be
remitted upon approval of the above
and conforme to PISCOR and PBM.
Subsequent deposits shall start on the
3rd year and annually thereafter
(every June 30th of the year) until
June 30, 2006.
Failure to pay one annual installment
shall make the whole obligation due
and demandable.
b) Write-off immediately P4.278 million.
The balance [of] P1.373 million to
remain outstanding in the books of the
Bank. Said balance will equal the
deposits to be remitted to the Bank for
a period of 17 years. 34
However, Atty. Aranda himself testi ed that both items
(a) and (b) quoted above were never complied with or
implemented. Not only was there no initial deposit of
P150,000 as required in the resolution, TRB also
disapproved the document prepared by the receiver,
which would have released Ching from his suretyship.
35
The Ruling of the Trial Court
The trial court found Ching liable to TRB for
P19,333,558.16 under the Deed of
 Suretyship. The trial court explained:
[T]he liability of Ching as a surety attaches
independently from his capacity as a
stockholder of the Philippine Blooming Mills.
Indisputably, under the Deed of Suretyship
defendant Ching unconditionally agreed to
assume PBM's liability to the plaintiff in the
event PBM defaulted in the payment of the
said obligation in addition to whatever
penalties, expenses and bank charges that
may occur by reason of default. Clear enough,
under the Deed of Suretyship (Exh. J),
defendant Ching bound himself jointly and
severally with PBM in the payment of the
latter's obligation to the plaintiff. The obligation
being solidary, the plaintiff Bank can hold
Ching liable upon default of the principal
debtor. This is explicitly provided in Article
1216 of the New Civil Code already quoted
above. 36
The dispositive portion of the trial court's Decision reads:
WHEREFORE, judgment is hereby rendered
declaring defendant Alfredo Ching liable to plaintiff
bank in the amount of P19,333,558.16 (NINETEEN
MILLION THREE HUNDRED THIRTY THREE
THOUSAND FIVE HUNDRED FIFTY EIGHT &
16/100) as of October 31, 1991, and to pay the legal
interest thereon from such date until it is fully paid.
To pay plaintiff 5% of the entire amount by way of
attorney's fees.
SO ORDERED. 37
The Ruling of the Court of Appeals
On appeal, Ching stated that as surety and solidary
debtor, he should bene t from the changed nature of the
obligation as provided in Article 1222 of the Civil Code,
which reads:
Article 1222. A solidary debtor may, in actions
led by the creditor, avail himself of all defenses which
are deprived from the nature of the obligation and of
those which are personal to him, or pertain to his own
share. With respect to those which personally belong
to the others, he may avail himself thereof only as
regards that part of the debt for which that latter are
responsible.
Ching claimed that his liability should likewise be
reduced since the equitable apportionment of PBM's
remaining assets among its creditors under the
rehabilitation proceedings would have the effect of
reducing PBM's liability. He also claimed that the amount
for which he was being held liable was excessive. He
contended that the outstanding principal balance, as stated
in TRB Board Resolution No. 5893-1990, was only
P5,650,749.09. 38 Ching also contended that he was not
liable for interest, as the loan documents did not stipulate
the interest rate, pursuant to Article 1956 of the Civil Code.
39 Finally, Ching asserted that the Deed of Suretyship
executed on 21 July 1977 could not guarantee obligations
incurred after its execution. 40
TRB did not le its appellee's brief. Thus, the Court
of Appeals resolved to submit the case for decision. 41
The Court of Appeals considered the following issues for its
determination:
1. Whether the Answer of Ching amounted to an
admission of liability.
 2. Whether Ching can still be sued as a surety after the The dispositive portion of the Decision of the Court
SEC placed PBM of Appeals reads:
under rehabilitation receivership, and if in the
WHEREFORE, the judgment of the
a
lower court is hereby AFFIRMED but modi
rmative, for how much. 42 ed with respect to the amount of liability of
defendant; Alfredo Ching which is lowered
The Court of Appeals resolved the rst two from P19,333;558.16 to P15,773,708.78 with
questions in favor of TRB, The appellate court stated: legal interest of 12% per annum until it is fully
paid.
Ching did not deny under oath the
genuineness and due execution of the L/Cs, SO ORDERED. 44
Trust Receipts, Undertaking, Deed of Surety,
and the 3.5 Million Peso Promissory Note The Court of Appeals denied Ching's Motion for
upon which TRB's action rested. He is, Reconsideration for lack of merit.
therefore; presumed to be liable unless he Hence, this petition.
presents evidence showing payment,
partially or in full, of these obligations Issues
(Investment and Underwriting Corporation of
the Philippines v. Comptronics Philippines, Ching assigns the following as errors of the Court of
Inc. and Gene v. Tamesis, 192 SCRA 725 Appeals:
[1990]). 1. THE COURT OF APPEALS
As surety of a corporation placed COMMITTED AN ERROR WHEN IT
under rehabilitation receivership, Ching can RULED THAT PETITIONER
answer separately for the obligations of ALFREDO CHING WAS LIABLE FOR
debtor PBM (Rizal Banking Corporation v. OBLIGATIONS CONTRACTED BY
Court of Appeals, Philippine Blooming Mills, PBM LONG AFTER THE
Inc., and Alfredo Ching, 178 SCRA 738 EXECUTION OF THE DEED OF
[1990], and Traders Royal Bank v. Philippine SURETYSHIP.
Blooming Mills and Alfredo Ching, 177 SCRA 2. THE COURT OF APPEALS
788 [1989]) COMMITTED AN ERROR WHEN IT
Even a[n] SEC injunctive order cannot RULED THAT THE PETITIONERS
suspend payment of the surety's obligation WERE LIABLE FOR THE TRUST
since the rehabilitation receivers are limited RECEIPTS DESPITE THE FACT
to the existing assets of the corporation. 43
 THAT PRIVATE RESPONDENT HAD
PREVENTED THEIR FULFILLMENT.
3. THE COURT OF APPEALS
COMMITTED AN ERROR WHEN IT
FOUND PETITIONER ALFREDO CHING
LIABLE FOR P15,773.708.78 WITH
LEGAL INTEREST AT 12% PER
ANNUM UNTIL FULLY PAID DESPITE
THE FACT THAT UNDER THE
REHABILITATION PLAN OF
PETITIONER PBM, WHICH WAS
APPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, PRIVATE
RESPONDENT IS ONLY ENTITLED TO
P1,373,415.00. 45
Ching asserted that the Deed of Suretyship dated 21 July
1977 could not answer for obligations not yet in existence
at the time of its execution. Speci cally, Ching maintained
that the Deed of Suretyship could not answer for debts
contracted by PBM in 1980 and 1981. Ching contended
that no accessory contract of suretyship could arise
without an existing principal contract of loan. Ching
likewise argued that TRB could no longer claim on the
trust receipts because TRB had already taken the
properties subject of the trust receipts. Ching likewise
maintained that his obligation as surety could not exceed
the P1,373,415 apportioned to PBM under the SEC-
approved rehabilitation plan.
In its Comment, TRB asserted that the rst two
assigned errors raised factual issues not brought before
the trial court. Furthermore, TRB pointed out that Ching
never presented PBM's rehabilitation plan before the trial
court. TRB also stated that the Supreme Court ruling in
Traders Royal Bank v. Court of Appeals 46 constitutes res
judicata between the parties. Therefore, TRB could
proceed against Ching separately from PBM to enforce in
full Ching's liability as surety. 47
The Ruling of the Court
The petition has no merit.
The case before us is an offshoot of the trial court's
denial of Ching's motion to have the case dismissed
against him. The petition is a thinly veiled attempt to make
this Court reconsider its decision in the prior case of
Traders Royal Bank v. Court of Appeals. 48 This Court has
already resolved the issue of Ching's separate liability as
a surety despite the rehabilitation proceedings before the
SEC. We held in Traders Royal Bank that:
Although Ching was impleaded in SEC
Case No. 2250, as a co-petitioner of PBM, the
SEC could not assume jurisdiction over his
person and properties. The Securities and
Exchange Commission was empowered, as
rehabilitation receiver, to take custody and
control of the assets and properties of PBM
only, for the SEC has jurisdiction over
corporations only [and] not over private
individuals, except stockholders in an intra -
corporate dispute (Sec. 5, P.D. 902-A and Sec.
2 of P.D. 1758). Being a nominal party in SEC
Case No. 2250, Ching's properties were not
included in the rehabilitation receivership that
the SEC constituted to take custody of PBM's
assets. Therefore, the petitioner bank was not
barred from ling a suit against Ching, as a
surety for PBM. An anomalous situation would
arise if individual sureties for debtor
 corporations may escape liability by simply co-
ling with the corporation a petition for
suspension of payments in the SEC whose
jurisdiction is limited only to corporations and
their corporate assets.
xxx xxx xxx
Ching can be sued separately to
enforce his liability as surety for PBM, as
expressly provided by Article 1216 of the
New Civil Code.
xxx xxx xxx
It is elementary that a corporation has
a personality distinct and separate from its
individual stockholders and members. Being
an o cer or stockholder of a corporation does
not make one's property the property also of
the corporation, for they are separate entities
(Adelio Cruz vs. Quiterio Dalisay, 152 SCRA
482).
Ching's act of joining as a co-petitioner
with PBM is SEC Case No. 2250 did not vest
in the SEC jurisdiction over his person or
property, for jurisdiction does not depend on
the consent or acts of the parties but upon
express provision of law (Tolentino vs. Social
Security System, 138 SCRA 428; Lee vs.
Municipal Trial Court of Legaspi City, Br. I, 145
SCRA 408). (Emphasis supplied)
Traders Royal Bank has fully resolved the issue
regarding Ching's liability as a surety of the credit
accommodations TRB extended to PBM. The decision
amounts to res judicata 49 which bars Ching from raising
the same issue again. Hence, the only question that
remains is the amount of Ching's liability. Nevertheless,
we shall resolve the issues Ching has raised in his
attempt to escape liability under his surety.
Whether Ching is liable for obligations PBM
contracted after execution of the Deed of
Suretyship
Ching is liable for credit obligations contracted by
PBM against TRB before and after the execution of the 21
July 1977 Deed of Suretyship. This is evident from the
tenor of the deed itself, referring to amounts PBM "may
now be indebted or may hereafter become indebted" to
TRB.
The law expressly allows a suretyship for "future
debts". Article 2053 of the Civil Code provides:
A guaranty may also be given as
security for future debts, the amount of which
is not yet known; there can be no claim against
the guarantor until the debt is liquidated. A
conditional obligation may also be secure.
(Emphasis supplied)
Furthermore, this Court has ruled in Diño v. Court
of Appeals 50 that:
Under the Civil Code, a guaranty may
be given to secure even future debts, the
amount of which may not be known at the
time the guaranty is executed. This is the
basis for contracts denominated as
continuing guaranty or suretyship. A
continuing guaranty is one which is not
limited to a single transaction, but which
contemplates a future course of dealing,
covering; a series of transactions, generally
for an inde nite time or until revoked. It is
prospective in its operation and is generally
intended to provide security with respect to
future transactions within certain limits, and
contemplates a succession of liabilities, for
which, as they accrue, the guarantor
becomes liable. Otherwise stated, a
continuing guaranty is one which covers all
transactions, including those arising in the
future, which are within the description or
contemplation of the contract of guaranty,
until the expiration or termination thereof. A
guaranty shall be construed as continuing
when by the terms thereof it is evident that
the object is to give a standing credit to the
principal debtor to be used from time to time
either inde nitely or until a certain period;
especially if the right to recall the guaranty is
expressly reserved. Hence, where the
contract states that the guaranty is to secure
advances to be made "from time to time," it
will be construed to be a continuing one.
In other jurisdictions, it has been held
that the use of particular words and
expressions such as payment of "any debt,"
"any indebtedness," or "any sum," or the
guaranty of "any transaction," or money to be
furnished the principal debtor "at any time,"
or "on such time" that the principal debtor
may require, have been construed to indicate
a continuing, guaranty.
Whether Ching's liability is limited to the amount stated in
PBM's rehabilitation plan
Ching would like this Court to rule that his liability is
limited, at most, to the amount stated in PBM's
rehabilitation plan. In claiming this reduced liability, Ching
invokes Article 1222 of the Civil Code which reads:
Art. 1222. A solidary debtor may, in actions led by
the creditor, avail himself of all defenses which are
derived from the nature of the obligation and of those
which are personal to him, or pertain to his own share.
With respect to those which personally belong to the
others, he may avail himself thereof only as regards
that part of the debt for which the latter are
responsible.
In granting the loan to PBM, TRB required
Ching's surety precisely to insure full recovery of the loan
in case PBM becomes insolvent or fails to pay in full. This
was the very purpose of the surety. Thus, Ching cannot
use PBM's failure to pay in full as justification for his own
reduced liability to TRB. As surely, Ching agreed to pay in
full PBM's loan in case PBM fails to pay in full for any
reason, including its insolvency.
TRB, as creditor, has the right under the surety to
proceed against Ching for the entire amount of PBM's
loan. This is clear from Article 1216 of the Civil Code:
ART. 1216. The creditor may proceed
against any one of the solidary debtors or
some or all of them simultaneously. The
demand made against one of thetas shall not
be an obstacle to those which may
subsequently be directed against the others,
 so long as the debt has not been fully
collected. (Emphasis supplied)
Ching further claims a reduced liability under TRB
Board Resolution No. 5935. This resolution states that
PBM's outstanding loans may be reduced to P1.373
million subject to certain conditions like the payment of
P150,000 initial payment. 51 The resolution also states
that TRB should not release Ching's solidary liability under
his surety. The resolution even directs TRB's
management to study Ching's criminal liability under the
trust documents. 52
Ching's own witness testi ed that Resolution No.
5935 was never implemented. For one, PBM or its
receiver never paid the P150,000 initial payment to TRB.
TRB also rejected the document that PBM's receiver
presented which would have released Ching from his
suretyship. Clearly, Ching cannot rely on Resolution No.
5935 to escape liability under his suretyship.
Ching's attempts to have this Court review the
factual issues of the case are improper. It is not a function
of the Supreme Court to assess and evaluate again the
evidence, testimonial and evidentiary, adduced by the
parties particularly where the findings of both the trial
court and the appellate court coincide on the matter. 53
Whether Ching is liable for the trust receipts
Ching is still liable for the amounts stated in the
letters of credit covered by the trust receipts. Other than
his bare allegations, Ching has not shown proof of
payment or settlement with TRB. Atty. Vicente Aranda,
TRB's corporate secretary and First Vice President of its
Human Resource Management Department, testi ed that
the conditions in the TRB board resolution presented by
Ching were not met or implemented, thus:
ATTY. AZURA
Q Going into the resolution itself. A certain
stipulation ha[s] been outlined, and may
I refer you to condition or step No. 1,
which reads: "a) Accept the P1.373
million deposits remitted over a period
of 17 years or until 2006 which shall be
applied directly to the account (as
remitted per hereto attached schedule).
The amount of P1.373 million shall be
considered as full payment of PBM's
account. (The receiver is amenable to
this alternative.) The initial
deposit/remittance which amounts to
P150,000.00 shall be remitted upon
approval of the above and conforme of
PISCOR [. . .] and PBM. Subsequent
deposit shall start on the 3rd year and
annually thereafter (every June 30th of
the year) until June 30, 2006.
Failure to pay one annual installment
shall make the whole obligation due
and demandable. Now Mr. Witness,
would you be in a position to inform
[the court] if these conditions listed in
item (a) in Resolution No. 5935, series
of 1990, were implemented or met?
A Yes. I know for a fact that the
conditions, more particularly the initial
deposit/remittance in the amount of
 P150,000.00 which have to be done
with approval was not remitted or met.
Q Will you clarify your answer. Would
you be in a position to inform the
court if those conditions were met?
Because your initial answer was yes.
A Yes sir, I am in a position to state that these
conditions were not met.
Q Let me refer you to the condition listed
as item (b) of the same resolution
which I read and quote: "Write off
immediately P4.278 million. The
balance of P1.373 million to remain
outstanding in the books of the bank.
Said balance will be remitted to the
Bank for a period of 17 years." Mr.
Witness, would you be in a position to
inform the court if the bank
implemented that particular condition?
A In the implementation of this settlement
the receiver prepared a document for
approval and conformity of the bank.
The said document would in effect
release the suretyship of Alfredo Ching
and for that reason the bank refused or
denied fixing its conformity and
approval with the court.
xxx xxx xxx
ATTY. ATIENZA ON REDIRECT EXAMINATION
Q Mr. Witness you stated that the reason
why the plaintiff bank did not
implement these conditionalities [sic]
was because the former defendant
corporation requested that the
suretyship of Alfredo Ching be
released, is that correct?
A I did not say that. I said that in effect
the document prepared by the lawyer
of the receiver . . . the bank would
release the suretyship of Alfredo
Ching, that is why the bank is not
amenable to such a document.
Q Despite this approved resolution the
bank, because of said requirement or
conformity did not seek to implement
these conditionalities [sic]?
A Yes sir because the conditions
imposed by the board is not being
followed in that document because it
was the condition of the board that the
suretyship should not be released but
the document being presented to the
bank for signature and conformity in
effect if signed would release the
suretyship. So it would be a violation
with the approval of the board so the
bank did not sign the conformity. 54
Ching also claims that TRB prevented PBM from ful lling
its obligations under the trust receipts when TRB, together
with other creditor banks, took hold of PBM's inventories,
including the goods covered by the trust receipts. Ching
asserts that this act of TRB released him from liability
under the suretyship. Ching forgets that he executed, on
behalf of PBM, separate Undertakings for each trust
receipt expressly granting to TRB the right to take
possession of the goods at any time to protect TRB's
interests. TRB may exercise such right without waiving its
right to collect the full amount of the loan to PBM. The
Undertakings also provide that any suspension of
payment or any assignment by PBM for the bene t of
creditors renders the loan due and demandable. Thus, the
separate Undertakings uniformly provide:
2. That the said BANK may at any time
cancel the foregoing trust and take
possession of said merchandise with
the right to sell and dispose of the
same under such terms and
conditions it may deem best, or of the
proceeds of such of the same as may
then have been sold, wherever the
said merchandise or proceeds may
then be found and all the provisions
of the Trust Receipt shall apply to
and be deemed to include said
above-mentioned merchandise if the
same shall have been made up or
used in the manufacture of any other
goods, or merchandise, and the said
BANK shall have the same rights and
remedies against the said
merchandise in its manufactured
state, or the product of said
manufacture as it would have had in
the event that such merchandise had
remained [in] its original state and
irrespective of the fact that other and
different merchandise is used in
completing such manufacture. In the
event of any suspension, or failure or
assignment for the bene t of creditors
on the part of the undersigned or of
the non-ful llment of any obligation,
or of the non-payment at maturity of
any acceptance made under said
credit, or any other credit issued by
the said BANK on account of the
undersigned or of the non-payment
of any indebtedness on the part of
the undersigned to the said BANK,
all obligations, acceptances,
indebtedness and liabilities
whatsoever shall thereupon without
notice mature and become due and
payable and the BANK may avail of
the remedies provided herein. 55
(Emphasis supplied)
Presidential Decree No. 115 ("PD No. 115"),
otherwise known as the Trust Receipts Law, expressly
allows TRB to take possession of the goods covered by
the trust receipts. Thus, Section 7 of PD No. 115 states:
SECTION 7. Rights of the entruster.
— The entruster shall be entitled to the
proceeds from the sale of the goods,
documents or instruments released under a
trust receipt to the entrustee to the extent of
the amount owing to the entruster or as
appears in the trust receipt, or to the return
of the goods, documents or instruments in
case of non-sale, and to the enforcement of
all other rights conferred on him in the trust
 receipt provided such are not contrary to the
provisions of this Decree.
The entruster may cancel the trust and take
possession of the goods, documents or
instruments subject of the trust or of the
proceeds realized therefrom at any time upon
default or failure of the entrustee to comply
with any of the terms and conditions of the trust
receipt or any other agreement between the
entruster and the entrustee, and the entruster
in possession of the goods, documents or
instruments may, on or after default, give
notice to the entrustee of the intention to sell,
and may, not less than ve days after serving or
sending of such notice, sell the goods,
documents or instruments at public or private
sale, and the entruster may, at a public sale,
become a purchaser. The proceeds of any
such sale, whether public or private, shall be
applied (a) to the payment of the expenses
thereof, (b) to the payment of the expenses of
re-taking, keeping and storing the goods,
documents or instruments; (c) to the
satisfaction of the entrustee's indebtedness to
the entruster. The entrustee shall receive any
surplus but shall be liable to the entruster for
any de ciency. Notice of sale shall be
deemed su ciently given if in writing, and
either personally served on the entrustee or
sent by post-paid ordinary mail to the
entrustee's last known business address.
(Emphasis supplied)
Thus, even though TRB took possession of the goods
covered by the trust receipts, PBM and Ching
remained liable for the entire amount of the loans
covered by they trust receipts.
Absent goof of payment or settlement of PBM and
Ching's credit obligations with TRB, Ching's liability is
what the Deed of Suretyship stipulates, plus the
applicable interest and penalties. The trust receipts, as
well as the Letter of Undertaking dated 16 April 1980
56 executed by PBM, stipulate in writing the payment of
interest without specifying the rate. In such a case, the
applicable interest rate shall be the legal rate, which is
now 12% per annum. 57 This is in accordance with Central
Bank Circular No. 416, which states:
By virtue of the authority granted to it
under Section 1 of Act No. 2655, as
amended, otherwise known as the "Usury
Law," the Monetary Board, in its Resolution
No. 1622 dated July 29, 1974, has
prescribed that the rate of interest for the
loan or forbearance of any money, goods or
credits and the rate allowed in judgments, in
the absence of express contract as to such
rate of interest, shall be twelve per cent
(12%) per annum. (Emphasis supplied)
On the other hand, the Promissory Note evidencing
the P3,500,000 trust loan provides for 18% interest per
annum plus 2% penalty interest per annum in case of
default. This stipulated interest should continue to run until
full payment of the P3,500,000 trust loan. In addition, the
accrued interest on all the credit accommodations should
earn legal interest from the date of filing of the complaint
pursuant to Article 2212 of the Civil Code.
 Art. 2212. Interest due shall earn 2. On Trust Receipt No. 113 (Letter of Credit No.
legal interest from the time it is judicially 563 AD)
demanded, although the obligation may be
silent upon this point. Outstanding Principal P1,191,137.13
Accrued Interest (12%
The trial court found and the appellate court a rmed per annum) 338,739.82
that the outstanding principal amounts as of the ling of the 3. On the Trust Loan (Promissory
complaint with the trial court on 13 May 1983 were Note)
P959,611.96 under Trust Receipt No. 106, P1,191,137.13
under Trust Receipt No. 113, and P3,500,000 for the trust Outstanding Principal P3,500,000.00
loan. As extracted from TRB's Statement of Account as of Accrued Interest (18% per
31 October 1991, 58 the accrued interest on the trust annum) 1,287,616.44
receipts and the trust loan as of the Accrued Penalty Interest (2%
ling of the complaint on 13 May 1983 were P311,387.51 per annum) 137,315.07
59 under Trust Receipt No. 106, P338,739.81 60 under
Trust Receipt No. 113, and P1,287,616.44 61 under the WHEREFORE, we AFFIRM the decision of the Court
trust loan. The penalty interest on the trust loan amounted of Appeals with MODIFICATION. Petitioner Alfredo Ching
to P137,315.07. 62 Ching did not rebut this Statement of shall pay respondent Traders Royal Bank the following (1)
Account which TRB presented during trial. on the credit accommodations under the trust receipts, the
total principal amount of P2,150,749.09 with legal interest at
Thus, the following is the summary of Ching's 12% per annum from 14 May 1983 until full payment;
liability under the suretyship as of 13 (2) on the trust loan evidenced by the Promissory Note,
May, 1983, the date of filing of TRB's complaint with the the principal sum of P3,500,000 with 20% interest per
trial court: annum from 14 May 1983 until full payment; (3) on the
1. On Trust Receipt No. 106 (Letter of Credit No. total accrued interest as of 13 May 1983, P2,075,058.84
479 AD) with 12% interest per annum from 14 May 1983 until full
payment. Petitioner Alfredo Ching shall also pay
attorney's fees to respondent Traders Royal Bank
Outstanding Principal P959,611.96
Accrued Interest (12% per equivalent to 5% of the total principal and interest. AIcaDC

annum) 311,387.51 SO ORDERED.

Davide, Jr ., C .J ., Vitug and Azcuna, JJ ., concur.
3. Ynares-Santiago, J ., is on leave.
 THIRD DIVISION
challenged Decision disposed as follows:
[G.R. No. 160324. November 15, 2005.]
INTERNATIONAL FINANCE
CORPORATION, Petitioner, vs.
IMPERIAL TEXTILE MILLS, INC., **
respondent.
DECISION
PANGANIBAN, J : p
The terms of a contract govern the rights and
obligations of the contracting parties. When the obligor
undertakes to be "jointly and severally" liable, it means
that the obligation is solidary. If solidary liability was
instituted to "guarantee" a principal obligation, the law
deems the contract to be one of suretyship.
The creditor in the present Petition was able to
show convincingly that, although denominated as a
"Guarantee Agreement," the Contract was actually a
surety. Notwithstanding the use of the words "guarantee"
and "guarantor," the subject Contract was indeed a surety,
because its terms were clear and left no doubt as to the
intention of the parties.
respective Motions for Reconsideration. AHCTEa
The Case
Before us is a Petition for Review 1 under Rule 45
of the Rules of Court, assailing the February 28, 2002
Decision 2 and September 30, 2003 Resolution 3 of the
Court of Appeals (CA) in CA-GR CV No. 58471. The
"WHEREFORE, the appeal is
PARTIALLY GRANTED. The decision of the
trial court is MODIFIED to read as follows:
"1. Philippine Polyamide Industrial
Corporation is ORDERED to pay [Petitioner]
International Finance Corporation, the
following amounts:
'(a) US$2,833,967.00 with accrued
interests as provided in the Loan
Agreement;
'(b) Interest of 12% per annum on
accrued interest, which shall be
counted from the date of filing
of the instant action up to the
actual payment;
'(c) P73,340.00 as attorney's fees;
'(d) Costs of suit.'
"2. The guarantor Imperial Textile
Mills, Inc. together with Grandtex is HELD
secondarily liable to pay the amount herein
adjudged to [Petitioner] International Finance
Corporation." 4
The assailed Resolution denied both parties'
The Facts
The facts are narrated by the appellate court as
follows:

"On December 17, 1974, [Petitioner]
International Finance Corporation (IFC) and
[Respondent] Philippine Polyamide Industrial
Corporation (PPIC) entered into a loan
agreement wherein IFC extended to PPIC a
loan of US$7,000,000.00, payable in sixteen
(16) semi-annual installments of US
$437,500.00 each, beginning June 1, 1977 to
December 1, 1984, with interest at the rate of
10% per annum on the principal amount of the
loan advanced and outstanding from time to
time. The interest shall be paid in US dollars
semi-annually on June 1 and December 1 in
each year and interest for any period less than
a year shall accrue and be pro-rated on the
basis of a 360-day year of twelve 30-day
months.
"On December 17, 1974, a
'Guarantee Agreement' was executed with .
. . Imperial Textile Mills, Inc. (ITM), Grand
Textile Manufacturing Corporation
(Grandtex) and IFC as parties thereto. ITM
and Grandtex agreed to guarantee PPIC's
obligations under the loan agreement.
"PPIC paid the installments due on
June 1, 1977, December 1, 1977 and June
1, 1978. The payments due on December 1,
1978, June 1, 1979 and December 1, 1979
were rescheduled as requested by PPIC.
Despite the rescheduling of the installment
payments, however, PPIC defaulted. Hence,
on April 1, 1985, IFC served a written notice
of default to PPIC demanding the latter to
pay the outstanding principal loan and all its
accrued interests. Despite such notice, PPIC
failed to pay the loan and its interests.
"By virtue of PPIC's failure to pay, IFC,
together with DBP, applied for the
extrajudicial foreclosure of mortgages on the
real estate, buildings, machinery, equipment
plant and all improvements owned by PPIC,
located at Calamba, Laguna, with the
regional sheriff of Calamba, Laguna. On July
30, 1985, the deputy sheriff of Calamba,
Laguna issued a notice of extrajudicial sale.
IFC and DBP were the only bidders during
the auction sale. IFC's bid was for
P99,269,100.00 which was equivalent to
US$5,250,000.00 (at the prevailing
exchange rate of P18.9084 = US$1.00). The
outstanding loan, however, amounted to US
$8,083,967.00 thus leaving a balance of
US$2,833,967.00. PPIC failed to pay the
remaining balance.
"Consequently, IFC demanded ITM
and Grandtex, as guarantors of PPIC, to pay
the outstanding balance. However, despite
the demand made by IFC, the outstanding
balance remained unpaid.
"Thereafter, on May 20, 1988, IFC led
a complaint with the RTC of Manila against
PPIC and ITM for the payment of the
outstanding balance plus interests and
attorney's fees.
"The trial court held PPIC liable for the
payment of the outstanding loan plus
interests. It also ordered PPIC to pay IFC its
 claimed attorney's fees. However, the trial
court relieved ITM of its obligation as
guarantor. Hence, the trial court dismissed
IFC's complaint against ITM.
xxx xxx xxx
"Thus, apropos the decision
dismissing the complaint against ITM, IFC
appealed [to the CA]." 5
Ruling of the Court of Appeals
The CA reversed the Decision of the trial court, insofar as
the latter exonerated ITM from any obligation to IFC.
According to the appellate court, ITM bound itself under
the "Guarantee Agreement" to pay PPIC's obligation upon
default. 6 ITM was not discharged from its obligation as
guarantor when PPIC mortgaged the latter's properties to
IFC. 7 The CA, however, held that ITM's liability as a
guarantor would arise only if and when PPIC could not
pay. Since PPIC's inability to comply with its obligation
was not su ciently established, ITM could not immediately
be made to assume the liability. 8
The September 30, 2003 Resolution of the CA
denied reconsideration. 9 Hence, this Petition. 10
The
Issues
Petitioner states the issues in this wise:
Whether or not ITM and Grandtex 11 are sureties and
"I. therefore, jointly and
severally liable with PPIC, for the payment of the
loan. TaIHEA
"II. Whether or not the Petition raises a question of law.
"III Whether or not the Petition raises a theory not raised
. in the lower court."
12
The main issue is whether ITM is a surety, and
thus solidarily liable with PPIC for the payment of the
loan.
The Court's Ruling
The Petition is meritorious.
Main Issue:
Liability of Respondent Under
the Guarantee Agreement
The present controversy arose from the following
Contracts: (1) the Loan Agreement dated December 17,
1974, between IFC and PPIC; 13 and (2) the Guarantee
Agreement dated December 17, 1974, between ITM and
Grandtex, on the one hand, and IFC on the other. 14
IFC claims that, under the Guarantee Agreement,
ITM bound itself as a surety to PPIC's obligations
proceeding from the Loan Agreement. 15 For its part, ITM
asserts that, by the terms of the Guarantee Agreement, it
was merely a guarantor 16 and not a surety. Moreover, any
ambiguity in the Agreement should be construed against
IFC — the party that drafted it. 17
Language of the
Contract
The premise of the Guarantee Agreement is found
in its preambular clause, which
reads:
"Whereas,
 Solidary Liability
"(A) By an Agreement of even date herewith
Agreed to by ITM
between IFC and PHILIPPINE
POLYAMIDE INDUSTRIAL CORPORATION While referring to ITM as a guarantor, the
(herein called the Company), Agreement speci cally stated that the corporation was
which agreement is herein called the Loan "jointly and severally" liable. To put emphasis on the
Agreement, IFC agrees to extend nature of that liability, the Contract further stated that ITM
to the Company a loan (herein called the
was a primary obligor, not a mere surety. Those
Loan) of seven million dollars
stipulations meant only one thing: that at bottom, and to
($7,000,000) on the terms therein set forth, including a
provision that all or all legal intents and purposes, it was a surety.
Indubitably
part of the Loan may be disbursed in a currency other than dollars, but only therefore, ITM bound itself to be
on condition that the Guarantors agree to guarantee the obligations liable
solidarily 21 of the with PPIC for the latter's obligations
Company in respect of the Loan as hereinafter provided. under the Loan Agreement with IFC. ITM thereby brought
itself to the level of PPIC and could not be deemed merely
"(B) The Guarantors, in order to induce IFC to enter into the Loan Agreement,
secondarily liable.
and in consideration of IFC entering into said Agreement, have agreed so to
Initially, ITM was a stranger to the Loan Agreement
guarantee such obligations of the Company." 18
between PPIC and IFC. ITM's liability commenced only
T h e obligations of the guarantors are when it guaranteed PPIC's obligation. It became a surety
meticulously expressed in the following provision: when it bound itself solidarily with the principal obligor.
Thus, the applicable law is as follows:
"Section 2.01. The Guarantors jointly
“Article 2047. By guaranty, a person, called the
and severally, irrevocably, absolutely and
guarantor bind himself to the creditor to fulfill the
unconditionally guarantee, as primary
obligors and not as sureties merely, the due
obligation of the principal in case the latter should fail to
and punctual payment of the principal of, and do so.
interest and commitment charge on, the “If a person binds himself solidarily with the
Loan, and the principal of, and interest on, principal debtor, the provisions of Section 4, Chapter 3,
the Notes, whether at stated maturity or upon Title I of this Book shall be observed. In such case the
prematuring, all as set forth in the Loan contract shall be called suretyship.” ." 22
Agreement and in the Notes." 19
The aforementioned provisions refer to Articles
The Agreement uses "guarantee" and "guarantors," 1207 to 1222 of the Civil Code on "Joint and Solidary
prompting ITM to base its argument on those words. 20
Obligations." Relevant to this case is Article 1216, which
This Court is not convinced that the use of the two words
limits the Contract to a mere guaranty. The speci c states:
stipulations in the Contract show otherwise.
 "The creditor may proceed against any one of the
solidary debtors or some or all of them
simultaneously. The demand made against one of
them shall not be an obstacle to those which may
subsequently be directed against the others, so long
as the debt has not been fully collected."
Pursuant to this provision, petitioner (as creditor)
was justi ed in taking action directly against respondent.
No Ambiguity in the
Undertaking
The Court does not nd any ambiguity in the
provisions of the Guarantee Agreement. When quali ed by
the term "jointly and severally," the use of the word
"guarantor" to refer to a "surety" does not violate the law.
23 As Article 2047 provides, a suretyship is created when
a guarantor binds itself solidarily with the principal obligor.
Likewise, the phrase in the Agreement — "as primary
obligor and not merely as surety" — stresses that ITM is
being placed on the same level as PPIC. Those words
emphasize the nature of their liability, which the law
characterizes as a suretyship.
The use of the word "guarantee" does not ipso facto
make the contract one of guaranty. 24 This Court has
recognized that the word is frequently employed in
business transactions to describe the intention to be
bound by a primary or an independent obligation. 25 The
very terms of a contract govern the obligations of the
parties or the extent of the obligor's liability. Thus, this
Court has ruled in favor of suretyship, even though
contracts were denominated as a "Guarantor's
Undertaking" 26 or a "Continuing Guaranty."
27
Contracts have the force of law between the
parties, 28 who are free to stipulate any matter not contrary
to law, morals, good customs, public order or public policy.
29 None of these circumstances are present, much less
alleged by respondent. Hence, this Court cannot give a
different meaning to the plain language of the Guarantee
Agreement.
Indeed, the nding of solidary liability is in line with
the premise provided in the "Whereas" clause of the
Guarantee Agreement. The execution of the Agreement
was a condition precedent for the approval of PPIC's loan
from IFC. Consistent with the position of IFC as creditor
was its requirement of a higher degree of liability from ITM
in case PPIC committed a breach. ITM agreed with the
stipulation in Section 2.01 and is now estopped from
feigning ignorance of its solidary liability. The literal
meaning of the stipulations control when the terms of the
contract are clear and there is no doubt as to the intention
of the parties. 30
We note that the CA denied solidary liability, on the
theory that the parties would not have executed a
Guarantee Agreement if they had intended to name ITM
as a primary obligor. 31 The appellate court opined that
ITM's undertaking was collateral to and distinct from the
Loan Agreement. On this point, the Court stresses that a
suretyship is merely an accessory or a collateral to a
principal obligation. 32 Although a surety contract is
secondary to the principal obligation, the liability of the
surety is direct, primary and absolute; or equivalent to that
of a regular party to the undertaking. 33 A surety becomes
liable to the debt and duty of the principal obligor even
without possessing a direct or personal interest in the
obligations constituted by the latter. 34
 IFC's allegations in the trial court and those in the CA.
ITM's Liability as Surety
Bare allegations without proof deserve no credence.
With the present nding that ITM is a surety, it is clear that Review of Factual
the CA erred in declaring the former secondarily liable. 35
Findings Necessary
A surety is considered in law to be on the same footing as
the principal debtor in relation to whatever is adjudged As to the issue that only questions of law may be
against the latter. 36 Evidently, the dispositive portion of raised in a Petition for Review, 39 the Court has
the assailed Decision should be modi ed to require ITM to recognized exceptions, 40 one of which applies to the
pay the amount adjudged in favor of IFC. AaDSEC
present case. The assailed Decision was based on a
Peripheral Issues misapprehension of facts, 41 which particularly related to
certain stipulations in the Guarantee Agreement —
In addition to the main issue, ITM raised procedural stipulations that had not been disputed by the parties. This
in rmities allegedly justifying the denial of the present circumstance compelled the Court to review the Contract
Petition. Before the trial court and the CA, IFC had firsthand and to make its own findings and conclusions
allegedly instituted different arguments that effectively accordingly.
changed the corporation's theory on appeal, in violation of
WHEREFORE, the Petition is hereby GRANTED,
this Court's previous pronouncements. 37 ITM further
and the assailed Decision and Resolution MODIFIED in
claims that the main issue in the present case is a
the sense that Imperial Textile Mills, Inc. is declared a
question of fact that is not cognizable by this Court. 38
surety to Philippine Polyamide Industrial Corporation. ITM
These contentions deserve little consideration. is ORDERED to pay International Finance Corporation the
same amounts adjudged against PPIC in the assailed
Alleged Change of
Decision. No costs.
Theory on Appeal
SO ORDERED.
Petitioner's arguments before the trial court (that
ITM was a "primary obligor") and before the CA (that ITM Corona, Carpio Morales and Garcia, JJ., concur.
was a "surety") were related and intertwined in the action
to enforce the solidary liability of ITM under the Guarantee Sandoval-Gutierrez, J., is on official leave.
Agreement. We emphasize that the terms "primary
obligor" and "surety" were premised on the same
stipulations in Section 2.01 of the Agreement. Besides,
both terms had the same legal consequences. There was
therefore effectively no change of theory on appeal. At any
rate, ITM failed to show to this Court a disparity between
 FIRST DIVISION
[G.R. No. 118342. January 5, 1998.]
DEVELOPMENT BANK OF THE
PHILIPPINES , petitioner, vs. COURT OF
APPEALS and LYDIA CUBA,
respondents.
[G.R. No. 118367. January 5, 1998.]
LYDIA P. CUBA , petitioner, vs. COURT
OF APPEALS, DEVELOPMENT BANK
OF THE PHILIPPINES and AGRIPINA P.
CAPERAL, respondents.
Office of the Legal Counsel DBP for petitioner.
Virgilio C . Leynes, Agripina Laperal J .C . Calida
and Associates for
respondent Lydia Cuba.
SYNOPSIS
Lydia P. Cuba (Cuba) obtained from the
Development Bank of the Philippines (DBP) three
separate loans, each of which was covered by a
promissory note. As a security for said loans, Cuba
executed two Deeds of Assignment of her Leasehold
Rights over her 44-hectare shpond. For failure of Cuba
to pay her loans, DBP appropriated her Leasehold
Rights over the shpond without foreclosure
proceedings. Subsequently, Cuba offered and agreed
to repurchase her leasehold rights from DBP. For
failure to pay the monthly amortizations stipulated in
the deed of conditional sale executed by DBP in favor
of Cuba, DBP took possession of the leasehold right
and subsequently sold the same to Agripina Capera.
Cuba led a complaint with the Regional Trial Court
seeking declaration of nullity DBP's appropriation of
her leasehold rights without foreclosure proceedings
which is contrary to Article 2088 of the Civil Code. The
trial court resolved the issue in favor of Cuba and
declared invalid the deed of assignment for being a
clear case of patum commissorium. On appeal, the
Court of Appeals reverse the decision of the trial court
and declared that the deed of assignment was an
express authority from Cuba for DBP to sell whatever
right she had over the shpond. The appellate court
likewise held that the deed of assignment amounted to
a novation of the promissory note.
The Supreme Court ruled that the deed of assignment
of leasehold rights was a mortgage contract. The
assignment, being in its essence a mortgage, was but
a security and not a satisfaction of indebtedness.
DBP's act of appropriating Cuba's rights was violative
of Article 2088 of the Civil Code, which forbids a
creditor from appropriating, or disposing of, the thing
given as security for the payment of debt. DBP cannot
take refuge in the deed of assignment to justify its act
of appropriating the leasehold rights since the said
deed did not provide that the leasehold rights would
automatically pass to DBP upon Cuba's failure to pay
the loans on time. It merely provided for the
appointment of DBP as attorney-in-fact with authority,
among other things, to sell or otherwise dispose of the
said real rights, in case of default by Cuba, and to
apply the proceeds to the payment of the loan. The
Supreme Court likewise found no merit in the
contention that the assignment novated the
promissory notes in that the obligation to pay a sum of
money was substituted by the assignment of the rights
over the shpond. The said assignment merely
complemented or supplemented the promissory notes.
The obligation to pay a sum of money remained, and
the assignment merely served as security for the loans
covered by the promissory notes.
HcSaAD
SYLLABUS
1. CIVIL LAW; OBLIGATIONS AND
CONTRACTS; MORTGAGE; AN ASSIGNMENT TO
GUARANTEE AN OBLIGATION IS VIRTUALLY A
MORTGAGE; CASE AT BAR. — We agree with CUBA
that the assignment of leasehold rights was a
mortgage contract. Simultaneous with the execution of
the notes was the execution "Assignments of
Leasehold Rights" where CUBA assigned her
leasehold rights and interest on a 44-hectare fishpond,
together with the improvements thereon. As pointed
out by CUBA, the deeds of assignment constantly
referred to the assignor (CUBA) as "borrower"; the
assigned rights, as mortgaged properties; and the
instrument itself, as mortgage contract. Moreover,
under condition No. 22 of the deed, it was provided that
"failure to comply with the terms and condition of any
of the loans shall cause all other loans to become due
and demandable and all mortgages shall be
foreclosed." And, condition No. 33 provided that if
"foreclosure is actually accomplished, the usual 10%
attorney's fees and 10% liquidated damages of the
total obligation shall be imposed." There is, therefore,
no shred of doubt that a mortgage was intended. In
People's Bank & Trust Co. vs. Odom, this Court had
the occasion to rule that an assignment to guarantee
an obligation is in effect as mortgage.
2. ID.; ID.; ID.; ASSIGNMENT OF RIGHTS
COMPLEMENTED AND DID NOT NOVATE THE
PROMISSORY NOTES. — We nd no merit in DBP's
contention that the assignment novated the
promissory notes in that the obligation to pay a sum of
money the loans (under the promissory notes) was
substituted by the assignment of the rights over the
shpond (under the deed of assignment). As correctly
pointed out by CUBA, the said assignment merely
complemented or supplemented the notes; both could
stand together. The former was only an accessory to
the latter. Contrary to DBP's submission, the obligation
to pay a sum of money remained, and the assignment
merely served as security for the loans were granted.
Also, the last paragraph of the assignment stated: "The
assignor further reiterates and states all terms,
covenants, are conditions stipulated in the promissory
note or notes covering the proceeds of this loan,
making said promissory note or notes, to all intent and
purposes, an integral part hereof".
3. ID.; ID.; PAYMENT BY CESSION ;
DOES NOT APPLY WHERE THERE IS ONLY ONE
CREDITOR. — Neither did the assignment amount to
payment by cession under Article 1255 of the Civil
Code for the plain and simple reason that there was
only one creditor, the DBP. Article 1255 contemplates
the existence of two or more creditors and involves the
assignment of all the debtor's property.\
4. ID.; ID.; DATION IN PAYMENT; DOES
NOT APPLY WHERE ASSIGNMENT WAS A MERE
SECURITY AND NOT IN SATISFACTION OF
INDEBTEDNESS. — Nor did the assignment
constitute dation in payment under Article 1245 of the
Civil Code, which reads: "Dation in payment, whereby
property is alienated to the creditor in satisfaction of a
debt in money, shall be governed by the law on sales."
It bears stressing that the assignment, being in its
essence a mortgage, was but a security and not a
satisfaction of indebtedness.
5. ID.; ID.; PACTUM COMMISSORIUM ;
ELEMENTS. — The elements of pactum
commissorium are as follows: (1) there should be a
property mortgaged by way of security for the payment
of the principal obligation, and (2) there should be a
stipulation for automatic appropriation by the creditor
of the thing mortgaged in case of non-payment of the
principal obligation within the stipulated period.
6. ID.; ID.; ID.; NOT PRESENT WHERE
THERE IS NO AUTOMATIC APPROPRIATION BY
THE CREDITOR OF THE THING MORTGAGED;
CASE AT BAR. — Condition No. 12 did not provide
that the ownership over the leasehold rights would
automatically pass to DBP upon CUBA's failure to pay
the loan on time. It merely provided for the
appointment of DBP as attorney-in-fact with authority,
among other things, to sell or otherwise dispose of the
said real rights, in case of default by CUBA, and to
apply the proceeds to the payment of the loan. This
provision is a standard condition in mortgage contracts
and is in conformity with Article 2087 of the Civil Code,
which authorizes the mortgagee to foreclose the
mortgage and alienate the mortgaged property for the
payment of the principal obligation. DBP, however,
exceeded the authority vested by condition No. 12 of
the deed of assignment. As admitted by it during the
pre-trial, it had "[w]ithout, foreclosure proceedings,
whether judicial or extrajudicial . . . appropriated the
[l]easehold rights of plaintiff Lydia Cuba over the
shpond in question." Its contention that it limited itself
to mere administration by posting caretakers is further
belied by the deed of conditional sale it executed in
favor of CUBA. DBP cannot take refuge in condition
No. 12 of the deed of assignment to justify its act of
appropriating the leasehold rights. As stated earlier,
condition No. 12 did not provide that CUBA's default
would operate to vest in DBP ownership of the said
rights. Besides, an assignment to guarantee an
obligation, as in the present case, is virtually a
mortgage and not an absolute conveyance of title
which confers ownership on the assignee.
7. ID.; ID.; MORTGAGE; CREDITOR
CANNOT APPROPRIATE THE THING GIVEN AS
SECURITY; CASE AT BAR. — At any rate, DBP's act
of appropriating CUBA's leasehold rights was violative
of Article 2088 of the Civil Code, which forbids a
creditor from appropriating, or disposing of the thing
given as security for the payment of a debt. Instead of
taking ownership of the questioned real rights upon
default by CUBA, DBP should have foreclosed the
mortgage, as has been stipulated in condition no. 22
of the deed of assignment. But, as admitted by DBP,
there was no such foreclosure. Yet, in its letter dated
26 October 1997, addressed to the Minister of
Agriculture and Natural Resources and coursed
through the Director of the Bureau of Fisheries and
Aquatic Resources, DBP declared that it "had
foreclosed the mortgage and enforced the assignment
of leasehold rights on March 21, 1979 for failure of said
spouses (CUBA spouses) to pay their loan
amortizations." This only goes to show that DBP was
aware of the necessity of foreclosure proceedings. In
view of the false representation of DBP that it had
already foreclosed the mortgage, the Bureau of
Fisheries cancelled CUBA's original lease permit,
approved the deed of conditional sale, and issued a
new permit in favor of CUBA. Said acts which were
predicated on such false representation, as well as the
subsequent acts emanating from DBP's appropriation
of the leasehold rights, should therefore be set aside.
To validate these acts would open the oodgates to
circumvention of Article 2088 of the Civil Code. Even
in cases where foreclosure proceedings were had, this
Court had not hesitated to nullify the consequent
auction sale for failure to comply with the requirements
laid down by law, such as Act No. 3135, as amended.
With more reason that the sale of property given as
security for the payment of a debt be set aside if there
was no prior foreclosure proceeding.
8. REMEDIAL LAW; ACTIONS;
ESTOPPEL; CANNOT GIVE VALIDITY TO AN ACT
PROHIBITED BY LAW. — The fact that CUBA offered
and agreed to purchase her leasehold rights from DBP
did not estop her from questioning DBP's act of
appropriation. Estoppel is unvailing in this case as held
by this Court in some cases estoppel cannot give
validity to an act that is prohibited by law or against
public policy. Hence, the appropriation of the leasehold
rights, being contrary to Article 2088 of the Civil Code
and to public policy, cannot be deemed validated by
estoppel.
9. CIVIL LAW; DAMAGES; ACTUAL OR
COMPENSATORY DAMAGES; MUST BE DULY
PROVED. — Actual or compensatory damages cannot
be presumed, but must be proved with reasonable
degree of certainty. A court cannot rely on
speculations, conjectures, or guesswork as to the fact
and amount of damages, but must depend upon
competent proof that they have been suffered by the
injured party and on the best obtainable evidence of
the actual amount thereof. It must point out speci c
facts which could afford a basis for measuring
whatever compensatory or actual damages' are borne.
10. ID.; ID.; ID.; ID.; CASE AT BAR. — In
the present case, the trial court awarded in favor of
CUBA P1,067,500 as actual damages consisting of
P550,000 which represented the value of the alleged
lost articles of CUBA and P517,500 which represented
the value of the 230,000 pieces of bangus allegedly
stocked in 1979 when
DBP rst ejected CUBA from the shpond and the
adjoining house. This award was a rmed by the Court
of Appeals. We nd that the alleged loss of personal
belongings and equipment was not proved by clear
evidence. Other than the testimony of CUBA and her
caretaker, there was no proof as to the existence of
those items before DBP took over the shpond in
question. With regard to the award of P517,000
representing the value of the alleged 230,000 pieces
of bangus which died when DBP took possession of
the shpond in March 1979, the same was not called
for. Such loss was not duly proved; besides, the claim
 therefor was delayed unreasonably. From 1979 until
after the ling of her complaint in court in May 1985,
CUBA did not bring to the attention of DBP the alleged
loss. The award of actual damages should, therefore,
be struck down for lack of sufficient basis.
11. ID.; ID.; MORAL DAMAGES; AWARD
PROPER WHERE ASSAILED ACT IS CONTRARY
TO LAW. — In view, however, of DBP's act of
appropriating CUBA's leasehold rights which was
contrary to law and public policy, as well as its false
representation to the then Ministry of Agriculture and
Natural Resources that it had "foreclosed the
mortgage," an award of moral damages in the amount
of P50,000 is in order conformably with Article
2219(10), in relation to Article 21, of the Civil Code.
12. ID.; ID.; EXEMPLARY OR
CORRECTIVE DAMAGES; AWARDED IN CASE AT
BAR. — Exemplary or corrective damages in the
amount of P25,000 should likewise be awarded by way
of example or correction for the public good.
13. ID.; ID.; ATTORNEY'S FEE;
RECOVERABLE WHERE THERE IS AWARD OF
EXEMPLARY DAMAGES. — There being an award of
exemplary damages, attorney's fees are also
recoverable.
DECISION
DAVIDE, JR., J :
p
These two consolidated cases stemmed from a
complaint 1 led against the Development Bank of the
Philippines (hereafter DBP) and Agripina Caperal led
by Lydia Cuba (hereafter CUBA) on 21 May 1985 with
the Regional Trial Court of Pangasinan, Branch 54.
The said complaint sought (1) the declaration of nullity
of DBP's appropriation of CUBA's rights, title, and
interests over a 44 -hectare shpond located in Bolinao,
Pangasinan, for being violative of Article 2088 of the
Civil Code; (2) the annulment of the Deed of
Conditional Sale executed in her favor by DBP; (3) the
annulment of DBP's sale of the subject shpond to
Caperal; (4) the restoration of her rights, title, and
interests over the shpond; and (5) the recovery of
damages, attorney's fees, and expenses of litigation. LLjur
After the joinder of issues following the ling by
the parties of their respective pleadings, the trial court
conducted a pre- trial where CUBA and DBP agreed
on the following facts, which were embodied in the pre-
trial order: 2
1. Plaintiff Lydia P. Cuba is a grantee of
a Fishpond Lease Agreement No.
2083 (new) dated May 13, 1974 from
the Government;
2. Plaintiff Lydia P. Cuba obtained loans
from the Development Bank of the
Philippines in the amounts of
P109,000.00; P109,000.00; and
P98,700.00 under the terms stated in
the Promissory Notes dated
September 6, 1974; August 11, 1975;
and April 4, 1977;
3. As security for said loans, plaintiff
Lydia P. Cuba executed two Deeds
of Assignment of her Leasehold
Rights;
4. Plaintiff failed to pay her loan on the
scheduled dates thereof in
accordance with the terms of the
Promissory Notes;
5. Without foreclosure proceedings,
whether judicial or extra-judicial,
defendant DBP appropriated the
leasehold Rights of plaintiff Lydia
Cuba over the fishpond in question;
6. After defendant DBP has appropriated the
Leasehold Rights of plaintiff
Lydia Cuba over the shpond in
question, defendant DBP, in turn,
executed a Deed of Conditional Sale
of the Leasehold Rights in favor of
plaintiff Lydia Cuba over the same
fishpond in question;
7. In the negotiation for repurchase,
plaintiff Lydia Cuba addressed two
letters to the Manager DBP, Dagupan
City dated November 6, 1979 and
December 20, 1979. DBP thereafter
accepted the offer to repurchase in a
letter addressed to plaintiff dated
February 1, 1982;
8. After the Deed of Conditional Sale was
executed in favor of plaintiff Lydia
Cuba, a new Fishpond Lease
Agreement No. 2083-A dated March
24, 1980 was issued by the Ministry of
Agriculture and Food in favor of
plaintiff Lydia Cuba only, excluding
her husband;
9. Plaintiff Lydia Cuba failed to pay the
amortizations stipulated in the Deed
of Conditional Sale;
10. After plaintiff Lydia Cuba failed to pay
the amortization as stated in Deed of
Conditional Sale, she entered with the
DBP a temporary arrangement
whereby in consideration for the
deferment of the Notarial Rescission of
Deed of Conditional Sale, plaintiff
Lydia Cuba promised to make certain
payments as stated in temporary
Arrangement dated February 23, 1982;
11. Defendant DBP thereafter sent a
Notice of Rescission thru Notarial Act
dated March 13, 1984, and which
was received by plaintiff Lydia Cuba;
12. After the Notice of Rescission,
defendant DBP took possession of
the Leasehold Rights of the fishpond
in question;
13. That after defendant DBP took possession
of the Leasehold Rights over
the shpond in question, DBP
advertised in the SUNDAY PUNCH
 the public bidding dated June 24,
1984, to dispose of the property;
14. That the DBP thereafter executed a
Deed of Conditional Sale in favor of
defendant Agripina Caperal on
August 6, 1984;
15. Thereafter, defendant Caperal was
awarded Fishpond Lease Agreement
No. 2083-A on December 28, 1984 by
the Ministry of Agriculture and Food.
Defendant Caperal admitted only the facts
stated in paragraphs 14 and 15 of the pre-trial order. 3
Trial was thereafter had on other matters.
The principal issue presented was whether the
act of DBP in appropriating to itself CUBA's leasehold
rights over the shpond in question without foreclosure
proceedings was contrary to Article 2088 of the Civil
Code and, therefore, invalid. CUBA insisted on an a
rmative resolution. DBP stressed that it merely
exercised its contractual right under the Assignments
of Leasehold Rights, which was not a contract of
mortgage. Defendant Caperal sided with DBP.
The trial court resolved the issue in favor of
CUBA by declaring that DBP's taking possession and
ownership of the property without foreclosure was
plainly violative of Article 2088 of the Civil Code which
provides as follows:
ART. 2088. The creditor cannot
appropriate the things given by way of
pledge or mortgage, or dispose of them. Any
stipulation to the contrary is null and void.
It disagreed with DBP's stand that the Assignments of
Leasehold Rights were not contracts of mortgage
because (1) they were given as security for loans (2)
although the "' shpond land"' in question is still a public
land, CUBA's leasehold rights and interest thereon are
alienable rights which can be the proper subject of a
mortgage; and
(3) the intention of the contracting parties to treat the
Assignment of Leasehold Rights as a mortgage was
obvious and unmistakable; hence, upon CUBA's
default, DBP's only right was to foreclose the
Assignment in accordance with law.
The trial court also declared invalid condition no.
12 of the Assignment of Leasehold Rights for being a
clear case of pactum commissorium expressly
prohibited and declared null and void by Article 2088
of the Civil Code. It then concluded that since DBP
never acquired lawful ownership of CUBA's leasehold
rights, all acts of ownership and possession by the said
bank were void. Accordingly, the Deed of Conditional
Sale in favor of CUBA, the notarial rescission of such
sale, and the Deed of Conditional Sale in favor of
defendant Caperal, as well as the Assignment of
Leasehold Rights executed by Caperal in favor of
DBP, were also void and ineffective.
As to damages, the trial court found "ample evidence
on record" that in 1984 the representatives of DBP
ejected CUBA and her caretakers not only from the
shpond area but also from the adjoining big house;
and that when CUBA's son and caretaker went there
on 15 September 1985, they found the said house
unoccupied and destroyed and CUBA's personal
belongings, machineries, equipment, tools, and other
articles used in shpond operation which were kept in WHEREFORE, judgment is hereby rendered
the house were missing. The missing items were in favor of plaintiff:
valued at about P550,000. It further found that when
1. DECLARING null and void and
CUBA and her men were ejected by DBP for the rst
without any legal effect the act of
time in 1979, CUBA had stocked the shpond with defendant Development Bank of
250,000 pieces of bangus sh (milk sh), all of which the Philippines in appropriating
died because the DBP representatives prevented for its own interest, without any
CUBA's men from feeding the sh. At the conservative judicial or extra-judicial
price of P3.00 per sh, the gross value would have been foreclosure, plaintiffs leasehold
P690,000, and after deducting 25% of said value as rights and interest over the
reasonable allowance for the cost of feeds, CUBA shpond land in question under
suffered a loss of P517,500. It then set the aggregate her Fishpond Lease Agreement
of the actual damages sustained by CUBA at No. 2083 (new);
P1,067,500.
2. DECLARING the Deed of
The trial court further found that DBP was guilty Conditional Sale dated
of gross bad faith in falsely representing to the Bureau February 21, 1980 by and
of Fisheries that it had foreclosed its mortgage on between the defendant
CUBA's leasehold rights. Such representation induced Development Bank of the
the said Bureau to terminate CUBA's leasehold rights Philippines and plaintiff (Exh. E
and to approve the Deed of Conditional Sale in favor and Exh. 1) and the acts of
of CUBA. And considering that by reason of her notarial rescission of the
unlawful ejectment by DBP, CUBA "suffered moral Development Bank of the
shock, degradation, social humiliation, and serious Philippines relative to said sale
anxieties for which she became sick and had to be (Exhs. 16 and 26) as void and
hospitalized" the trial court found her entitled to moral ineffective;
and exemplary damages. The trial court also held that
3. DECLARING the Deed of
CUBA was entitled to P100,000 attorney's fees in view
Conditional Sale dated August
of the considerable expenses she incurred for lawyers' 16, 1984 by and between the
fees and in view of the finding that she was entitled to Development Bank of the
exemplary damages. Philippines and defendant
In its decision of 31 January 1990, 4 the trial court Agripina Caperal (Exh. F and
disposed as follows: Exh. 21), the Fishpond Lease
Agreement No. 2083-A dated
December 28, 1984 of
 defendant Agripina Caperal b) The sum of ONE
(Exh. 23) and the Assignment HUNDRED
of Leasehold Rights dated THOUSAND
February 12, 1985 executed by (P100,000.00) PESOS
defendant Agripina Caperal in
as moral damages;
favor of the defendant
Development Bank of the c) The sum of FIFTY
Philippines (Exh. 24) as void ab THOUSAND
initio;
cdtai
(P50,000.00) PESOS,
4. ORDERING defendant as and for exemplary
Development Bank of the damages;
Philippines and defendant d) And the sum of ONE
Agripina Caperal, jointly and
HUNDRED
severally, to restore to plaintiff
THOUSAND
the latter's leasehold rights and
interests and right of (P100,000.00) PESOS,
possession over the shpond as and for attorney's
land in question, without fees;
prejudice to the right of 6. And ORDERING defendant
defendant Development Bank Development Bank of the
of the Philippines to foreclose Philippines to reimburse and
the securities given by plaintiff; pay to defendant Agripina
5. ORDERING defendant Caperal the sum of ONE
Development Bank of the Philippines MILLION FIVE HUNDRED
to pay to plaintiff the following THIRTY-TWO THOUSAND
amounts: SIX HUNDRED TEN PESOS
AND SEVENTY-FIVE
a) The sum of ONE CENTAVOS (P1,532,610.75)
MILLION SIXTY- representing the amounts paid
SEVEN THOUSAND by defendant Agripina Caperal
FIVE HUNDRED to defendant Development
PESOS Bank of the Philippines under
(P1,067,500.00), as and their Deed of Conditional Sale.
for actual damages;
 CUBA and DBP interposed separate appeals
from the decision to the Court of Appeals. The former
sought an increase in the amount of damages, while
the latter questioned the findings of fact and law of the
lower court.
In its decision 5 of 25 May 1994, the Court of
Appeals ruled that (1) the trial court erred in declaring
that the deed of assignment was null and void and that
defendant Caperal could not validly acquire the
leasehold rights from DBP; (2) contrary to the claim of
DBP, the assignment was not a cession under Article
1255 of the Civil Code because DBP appeared to be
the sole creditor to CUBA — cession presupposes
plurality of debts and creditors; (3) the deeds of
assignment represented the voluntary act of CUBA in
assigning her property rights in payment of her debts,
which amounted to a novation of the promissory notes
executed by CUBA in favor of DBP; (4) CUBA was
estopped from questioning the assignment of the
leasehold rights, since she agreed to repurchase the
said rights under a deed of conditional sale; and (5)
condition no. 12 of the deed of assignment was an
express authority from CUBA for DBP to sell whatever
right she had over the shpond. It also ruled that CUBA
was not entitled to loss of pro ts for lack of evidence,
but agreed with the trial court as to the actual damages
of P1,067,500. It, however, deleted the amount of
exemplary damages and reduced the award of moral
damages from P100,000 to P50,000 and attorney's
fees, from P100.00 to P50,000.
The Court of Appeals thus declared as valid the
following: (1) the act of DBP in appropriating Cuba's
leasehold rights and interest under Fishpond Lease
Agreement No. 2083; (2) the deeds of assignment
executed by Cuba in favor of DBP; (3) the deed of
conditional sale between CUBA and DBP; and (4) the
deed of conditional sale between DBP and Caperal,
the Fishpond Lease Agreement in favor of Caperal,
and the assignment of leasehold rights executed by
Caperal in favor of DBP. It then ordered DBP to turn
over possession of the property to Caperal as lawful
holder of the leasehold rights and to pay CUBA the
following amounts: (a) P1,067,500 as actual damages;
P50,000 as moral damages; and P50,000 as
attorney's fees.
Since their motions for reconsideration were denied, 6
DBP and CUBA filed separate petitions for review.
In its petition (G.R. No. 118342), DBP assails
the award of actual and moral damages and attorney's
fees in favor of CUBA.
Upon the other hand, in her petition (G.R. No.
118367), CUBA contends that the Court of Appeals
erred (1) in not holding that the questioned deed of
assignment was a pactum commissorium contrary to
Article 2088 of the Civil Code; (b) in holding that the
deed of assignment effected a novation of the
promissory notes; (c) in holding that CUBA was
estopped from questioning the validity of the deed of
assignment when she agreed to repurchase her
leasehold rights under a deed of conditional sale; and
(d) in reducing the amounts of moral damages and
attorney's fees, in deleting the award of exemplary
damages, and in not increasing the amount of
damages.
We agree with CUBA that the assignment of
leasehold rights was mortgage contract.
 It is undisputed that CUBA obtained from DBP
three separate loans totalling P335,000, each of which
was covered by a promissory note. In all of these
notes, there was a provision that: "In the event of
foreclosure of the mortgage securing this notes, I/We
further bind myself/ourselves, jointly and severally, to
pay the deficiency, if any." 7
Simultaneous with the execution of the notes
was the execution of "Assignments of Leasehold
Rights" 8 where CUBA assigned her leasehold rights
and interest on a 44-hectare fishpond, together with
the improvements thereon. As pointed out by CUBA,
the deeds of assignment constantly referred to the
assignor (CUBA) as "borrower"; the assigned rights, as
mortgaged properties; and the instrument itself, as
mortgage contract. Moreover, under condition no. 22
of the deed, it was provided that "failure to comply with
the terms and condition of any of the loans shall cause
all other loans to become due and demandable and all
mortgages shall be foreclosed." And, condition no. 33
provided that if " foreclosure is actually accomplished,
the usual 10% attorney's fees and 10% liquidated
damages of the total obligation shall be imposed."
There is, therefore, no shred of doubt that a mortgage
was intended.
Besides, in their stipulation of facts the parties
admitted that the assignment was by way of security
for the payment of the loans; thus:
3. As security for said loans, plaintiff
Lydia P. Cuba executed two Deeds
of Assignment of her Leasehold
Rights. LibLex
In People's Bank & Trust Co . vs. Odom, 9 this
Court had the occasion to rule that an assignment to
guarantee an obligation is in effect a mortgage.
We nd no merit in DBP's contention that the
assignment novated the promissory notes in that the
obligation to pay a sum of money the loans (under the
promissory notes) was substituted by the assignment
of the rights over the shpond (under the deed of
assignment). As correctly pointed out by CUBA, the
said assignment merely complemented or
supplemented the notes; both could stand together.
The former was only an accessory to the latter.
Contrary to DBP's submission, the obligation to pay a
sum of money remained, and the assignment merely
served as security for the loans covered by the
promissory notes. Signi cantly, both the deeds of
assignment and the promissory notes were executed
on the same dates the loans were granted. Also, the
last paragraph of the assignment stated: "The assignor
further reiterates and states all terms, covenants and
conditions stipulated in the promissory note or notes
covering the proceeds of this loan, making said
promissory note or notes, to all intent and purposes,
an integral part hereof."
Neither did the assignment amount to payment
by cession under Article 1255 of the Civil Code for the
plain and simple reason that there was only one
creditor, the DBP. Article 1255 contemplates the
existence of two or more creditors and involves the
assignment of all the debtor's property.
Nor did the assignment constitute dation in
payment under Article 1245 of the Civil Code, which
reads: "Dation in payment, whereby property is
alienated to the creditor in satisfaction of a debt in
money, shall be governed by the law on sales." It bears
stressing that the assignment, being in its essence a
mortgage, was but a security and not a satisfaction of
indebtedness. 10
We do not, however, buy CUBA's argument
that condition no. 12 of the deed of assignment
constituted pactum commissorium. Said condition
reads:
12. That effective upon the breach
of any condition of this assignment, the
Assignor hereby appoints the Assignee his
Attorney-in-fact with full power and authority to
take actual possession of the property above-
described, together with all improvements
thereon, subject to the approval of the
Secretary of Agriculture and Natural
Resources, to lease the same or any portion
thereof and collect rentals, to make repairs or
improvements thereon and pay the same, to
sell or otherwise dispose of whatever rights the
Assignor has or might have over said property
and/or its improvements and perform any other
act which the Assignee may deem convenient
to protect its interest. All expenses advanced
by the Assignee in connection with purpose
above indicated which shall bear the same rate
of interest aforementioned are also
guaranteed by this Assignment. Any amount
received from rents, administration, sale or
disposal of said property may be supplied by
the Assignee to the payment of repairs,
improvements, taxes, assessments and other
incidental expenses and obligations and the
balance, if any, to the payment of interest and
then on the capital of the indebtedness
secured hereby. If after disposal or sale of said
property and upon application of total amounts
received there shall remain a de ciency, said
Assignor hereby binds himself to pay the same
to the Assignee upon demand, together with all
interest thereon until fully paid. The power
herein granted shall not be revoked as long as
the Assignor is indebted to the Assignee and
all acts that may be executed by the Assignee
by virtue of said power are hereby ratified.
The elements of pactum commissorium are as
follows: (1) there should be a property mortgaged by
way of security for the payment of the principal
obligation, and
(2) there should be a stipulation for automatic
appropriation by the creditor of the thing mortgaged in
case of non-payment of the principal obligation within
the stipulated period. 11
Condition no. 12 did not provide that the
ownership over the leasehold rights would
automatically pass to DBP upon CUBA's failure to pay
the loan on time. It merely provided for the
appointment of DBP as attorney-in-fact with authority,
among other things, to sell or otherwise dispose of the
said real rights, in case of default by CUBA, and to
apply the proceeds to the payment of the loan. This
provision is a standard condition in mortgage contracts
and is in conformity with Article 2087 of the Civil Code,
which authorizes the mortgagee to foreclose the
mortgage and alienate the mortgaged property for the
payment of the principal obligation. dctai
DBP, however, exceeded the authority vested by
condition no. 12 of the deed of assignment. As
admitted by it during the pre-trial, it had "without
foreclosure proceedings, whether judicial or
extrajudicial, . . . appropriated the [l]easehold [r]ights
of plaintiff Lydia Cuba over the shpond in question."
Its contention that it limited itself to mere
administration by posting caretakers is further belied
by the deed of conditional sale it executed in favor of
CUBA. The deed stated:
WHEREAS, the Vendor [DBP] by
virtue of a deed of assignment executed in
its favor by the herein vendees [Cuba
spouses] the former acquired all the rights
and interest of the latter over the above-
described property;
xxx xxx xxx
The title to the real estate property
[sic] and all improvements thereon shall
remain the name of the Vendor until after the
purchase price, advances and interest shall
have been fully paid. (Emphasis supplied).
It is obvious from the above-quoted paragraphs
that DBP had appropriated and taken ownership of
CUBA's leasehold rights merely on the strength of the
deed of assignment.
DBP cannot take refuge in condition no. 12 of
the deed of assignment to justify its act of appropriating
the leasehold rights. As stated earlier, condition no. 12
did not provide that CUBA's default would operate to
vest in DBP ownership of the said rights. Besides an
assignment to guarantee an obligation, as in the
present case, is virtually a mortgage and not an
absolute conveyance of title which confers ownership
on the assignee. 12
At any rate, DBP's act of appropriating CUBA's
leasehold rights was violative of Article 2088 of the
Civil Code, which forbids a creditor from appropriating,
or disposing of, the thing given as security for the
payment of a debt.
The fact that CUBA offered and agreed to
repurchase her leasehold rights from DBP did not
estop her from questioning DBP's act of appropriation.
Estoppel is unavailing in this case. As held by this
Court in some cases, 13 estoppel cannot give validity
to an act that is prohibited by law or against public
policy. Hence, the appropriation of the leasehold
rights, being contrary to Article 2088 of the Civil Code
and to public policy, cannot be deemed validated by
estoppel.
Instead of taking ownership of the questioned
real rights upon default by CUBA, DBP should have
foreclosed the mortgage, as has been stipulated in
condition no. 22 of the deed of assignment. But, as
admitted by DBP, there was no such foreclosure. Yet
in its letter dated 26 October 1979, addressed to the
Minister of Agriculture and Natural Resources and
coursed through the Director of the Bureau of Fisheries
and Aquatic Resources, DBP declared that it "had
foreclosed the mortgage and enforced the assignment
of leasehold rights on March 21, 1979 for failure of said
spouses [Cuba spouses] to pay their loan
amortizations." 14 This only goes to show that DBP was
aware of the necessity of foreclosure proceedings.
 In view of the false representation of DBP that it
had already foreclosed the mortgage, the Bureau of
Fisheries canceled CUBA's original lease permit,
approved the deed of conditional sale, and issued a
new permit in favor of CUBA. Said acts which were
predicated on such false representation, as well as the
subsequent acts emanating from DBP's appropriation
of the leasehold rights, should therefore be set aside.
To validate these acts would open the oodgates to
circumvention of Article 2088 of the Civil Code.
Even in cases where foreclosure proceedings were
had, this Court had not hesitated to nullify the
consequent auction sale for failure to comply with the
requirements laid down by law, such as Act No. 3135,
as amended. 15 With more reason that the sale of
property given as security for the payment of a debt be
set aside if there was no prior foreclosure proceeding.
Hence, DBP should render an accounting of the
income derived from the operation of the shpond in
question and apply the said income in accordance with
condition no. 12 of the deed of assignment which
provided: "Any amount received from rents,
administration, . . . may be applied to the payment of
repairs, improvements, taxes, assessment, and other
incidental expenses and obligations and the balance,
if any, to the payment of interest and then on the
capital of the indebtedness . . ."
We shall now take up the issue of damages.
Article 2199 provides:
Except as provided by law or by
stipulation, one is entitled to an adequate
compensation only for such pecuniary loss
suffered by him as he has duly proved. Such
compensation is referred to as actual or
compensatory damages.
Actual or compensatory damages cannot be
presumed, but must be proved with reasonable degree
of certainty. 16 A court cannot rely on speculations,
conjectures, or guesswork as to the fact and amount
of damages, but must depend upon competent proof
that they have been suffered by the injured party and
on the best obtainable evidence of the actual amount
thereof. 17 It must point out speci c facts which could
afford a basis for measuring whatever compensatory
or actual damages are borne. 18
In the present case, the trial court awarded in
favor of CUBA P1,067,500 as actual damages
consisting of P550,000 which represented the value of
the alleged lost articles of CUBA and P517,500 which
represented the value of the 230,000 pieces of bangus
allegedly stocked in 1979 when DBP rst ejected CUBA
from the shpond and the adjoining house. This award
was affirmed by the Court of Appeals.
We nd that the alleged loss of personal
belongings and equipment was not proved by clear
evidence. Other than the testimony of CUBA and her
caretaker, there was no proof as to the existence of
those items before DBP took over the shpond in
question. As pointed out by DBP, there was no
"inventory of the alleged lost items before the loss
which is normal in a project which sometimes, if not
most often, is left to the care of other persons." Neither
was a single receipt or record of acquisition presented.
Curiously, in her complaint dated 17 May 1985,
CUBA included "losses of property" as among the
damages resulting from DBP's take-over of the
shpond. Yet, it was only in September 1985 when her
son and a caretaker went to the fishpond and the
adjoining house that she came to know of the alleged
loss of several articles. Such claim for "losses of
property," having been made before knowledge of the
alleged actual loss, was therefore speculative. The
alleged loss could have been a mere afterthought or
subterfuge to justify her claim for actual damages.
With regard to the award of P517,000
representing the value of the alleged 230,000 pieces
of bangus which died when DBP took possession of
the shpond in March 1979, the same was not called
for. Such loss was not duly proved; besides, the claim
therefor was delayed unreasonably. From 1979 until
after the ling of her complaint in court in May 1985,
CUBA did not bring to the attention of DBP the alleged
loss. In fact, in her letter dated 24 October 1979, 19 she
declared:
1. That from February to May 1978, I was
then seriously ill in Manila and within the
same period I neglected the management
and supervision of the cultivation and
harvest of the produce of the aforesaid
shpond thereby resulting to the
irreparable loss in the produce of the
same in the amount of about
P500,000.00 to my great damage and
prejudice due to fraudulent acts of some
of my fishpond workers.
Nowhere in the said letter, which was written
seven months after DBP took possession of the
shpond, did CUBA intimate that upon DBP's take-over
there was a total of 230,000 pieces of bangus, but all
of which died because of DBP's representatives
prevented her men from feeding the fish.
The award of actual damages should, therefore,
be struck down for lack of sufficient basis.
In view however, of DBP's act of appropriating
CUBA's leasehold rights which was contrary to law and
public policy, as well as its false representation to the
then Ministry of Agriculture and Natural Resources that
it had "foreclosed the mortgage," an award of moral
damages in the amount of P50,000 is in order
conformably with Article 2219(10), in relation to Article
21 of the Civil Code. Exemplary or corrective damages
in the amount of P25,000 should likewise be awarded
by way of example or correction for the public good. 20
There being an award of exemplary damages,
attorney's fees are also recoverable. 21
WHEREFORE, the 25 May 1994 Decision of the
Court of Appeals in CA-G.R. CV No. 26535 is hereby
REVERSED, except as to the award of P50,000 as
moral damages, which is hereby sustained. The 31
January 1990 Decision of the Regional Trial Court of
Pangasinan, Branch 54, in Civil Case No. A-1574 is
MODIFIED setting aside the nding that condition no.
12 of the deed of assignment constituted pactum
commissorium and the award of actual damages; and
by reducing the amounts of moral damages from
P100,000 to P50,000; the exemplary damages, from
P50,000 to P25,000; and the attorney's fees, from
P100,000 to P20,000. The Development Bank of the
Philippines is hereby ordered to render an accounting
of the income derived from the operation of the
fishpond in question.
 Let this case be REMANDED to the trial court FIRST DIVISION
for the reception of the income statement of DBP, as
well as the statement of the account of Lydia P. Cuba, [G.R. No. 126800. November 29, 1999.]
and for the determination of each party's financial
obligation to one another. NATALIA P. BUSTAMANTE, petitioner,
SO ORDERED. vs. SPOUSES RODITO F. ROSEL and
Bellosillo, Vitug and Kapunan, JJ., concur. NORMA A. ROSEL, respondents.

Emerico B. Lomibao for petitioner.

Julio C Contreras for private respondents.

SYNOPSIS

Norma Rosel, respondent herein, entered into a

loan agreement with petitioner. Petitioner used as
collateral a portion of land she owned with an area of 70
sq. m., inclusive of the apartment thereon. Under the
terms of their agreement, the lender has the option to buy
the collateral for the amount of P200,000.00 inclusive of
the borrowed amount (P100,000.00) and interest therein
(18% per annum). When the loan was about to mature,
respondents proposed to buy the land at the pre -set price
of P200,000.00. Petitioner refused to sell and requested
for extension of time to pay the loan and offered to sell
another land instead. Respondents refused all proposals
of the petitioner. On maturing date of the loan, petitioner
tendered payment to the respondents, which the latter
refused to accept and insisted that petitioner signed a
prepared deed of absolute sale of the collateral.
Respondents refused. They thereafter led with the
Regional Trial Court a complaint for speci c performance
with consignation against petitioner. A few days later,
petitioner filed a petition for consignation and deposited
the amount of P153,000.00. After due trial, the trial court
rendered a decision denying the execution of the deed of
sale to convey the collateral and ordered that the loan be
paid with the corresponding interest thereon.
Respondents appealed to the Court of Appeals, which
reversed and set aside the decision of the trial court and
ordering herein petitioner to execute the necessary Deed
of Sale and accept the balance of payment thereon.
Hence, this petition for review on certiorari. The questions
here are whether petitioner failed to pay the loan at its
maturity date, and whether the stipulation in the loan
contract was valid and enforceable.
The Supreme Court ruled that the petitioner did not
fail to pay the loan. When the respondents refused to
accept payment, petitioner consigned the amount with the
trial court. A scrutiny of the stipulation of the parties
reveals a subtle intention of the creditor to acquire the
property given as security for the loan. This is embraced
in the concept of pactum commissorium , which is
proscribed by law. The petition was granted and the
decision of the Court of Appeals was reversed.
SYLLABUS
1. CIVIL LAW; CONDITIONAL OBLIGATION;
SALE OF COLLATERAL IS OBLIGATION WITH
SUSPENSIVE CONDITION; CASE AT BAR. — The
sale of the collateral is an obligation with a
suspensive condition. It is dependent upon the
happening of an event, without which the obligation to
sell does not arise. Since the event did not occur,
respondents do not have the right to demand ful
llment of petitioner's obligation, especially where the
same would not only be disadvantageous to petitioner
but would also unjustly enrich respondents
considering the inadequate consideration
(P200,000.00) for a 70 square meter property
situated at Congressional Avenue, Quezon City.
2. ID.; CONTRACTS; HAVE THE FORCE OF LAW
BETWEEN THE CONTRACTING PARTIES;
EXCEPTION. — Respondents argue that contracts have
the force of law between the contracting parties and must
be complied with in good faith. There are, however,
certain exceptions to the rule, speci cally Article 1306 of
the Civil Code, which provides: "Article 1306. The
contracting parties may establish such stipulations,
clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals,
good customs, public order, or public policy."
3. ID.; ID.; LOAN; PACTUM COMMISSORIUM;
ELEMENTS. — The elements of pactum commissorium
are as follows: (1) there should be a property mortgaged
by way of security for the payment of the principal
obligation, and (2) there should be a stipulation for
automatic appropriation by the creditor of the thing
mortgaged in case of non-payment of the principal
obligation within the stipulated period.
4. ID.; ID.; ID.; ID.; CONSTRUED IN CASE AT
BAR. — A signi cant task in contract interpretation is the
ascertainment of the intention of the parties and looking
into the words used by the parties to project that
intention. In this case, the intent to appropriate the
property given as collateral in favor of the creditor
appears to be evident, for the debtor is obliged to
dispose of the collateral at the pre-agreed consideration
amounting to practically the same amount as the loan. In
effect, the creditor acquires the collateral in the event of
non-payment of the loan. This is within the concept of
pactum commissorium. Such stipulation is void.
RESOLUTION
PARDO, J : p
The case before the Court is a petition for review on
certiorari 1 to annul the decision of the Court of Appeals, 2
reversing and setting aside the decision of the Regional
Trial Court, 3 Quezon City, Branch 84, in an action for
specific performance with consignation. cdrep
On March 8, 1987, at Quezon City, Norma Rosel
entered into a loan agreement with petitioner Natalia
Bustamante and her late husband Ismael C. Bustamante,
under the following terms and conditions:
"1. That the borrowers are the
registered owners of a parcel of land,
evidenced by TRANSFER CERTIFICATE
OF TITLE No. 80667, containing an area of
FOUR HUNDRED TWENTY THREE (423)
SQUARE Meters, more or less, situated
along Congressional Avenue.
"2. That the borrowers were desirous to borrow the sum
of ONE HUNDRED THOUSAND (P100,000.00) PESOS
from the LENDER, for a period of two (2) years, counted
from March 1, 1987, with an interest of EIGHTEEN
(18%) PERCENT per annum, and to guaranty the
payment thereof, they are putting as a collateral
SEVENTY (70) SQUARE METERS portion, inclusive of
the apartment therein, of the aforestated parcel of land,
however, in the event the borrowers fail to pay, the
lender has the option to buy or purchase the collateral
for a total consideration of TWO HUNDRED
THOUSAND (P200,000.00) PESOS, inclusive of the
borrowed amount and interest therein;
"3. That the lender do hereby manifest
her agreement and conformity to the
preceding paragraph, while the borrowers do
hereby confess receipt of the borrowed
amount." 4
When the loan was about to mature on March 1,
1989, respondents proposed to buy at the pre-set price of
P200,000.00, the seventy (70) square meters parcel of
land covered by TCT No. 80667, given as collateral to
guarantee payment of the loan. Petitioner, however,
refused to sell and requested for extension of time to pay
the loan and offered to sell to respondents another
residential lot located at Road 20, Project 8, Quezon City,
with the principal loan plus interest to be used as down
payment. Respondents refused to extend the payment of
the loan and to accept the lot in Road 20 as it was
occupied by squatters and petitioner and her husband
were not the owners thereof but were mere land
developers entitled to subdivision shares or commission if
and when they developed at least one half of the
subdivision area. 5
Hence, on March 1, 1989, petitioner tendered
payment of the loan to respondents which the latter
refused to accept, insisting on petitioner's signing a
prepared deed of absolute sale of the collateral.
 On February 28, 1990, respondents led with the
Regional Trial Court, Quezon City, Branch 84, a complaint
for speci c performance with consignation against
petitioner and her spouse. 6
Nevertheless, on March 4, 1990, respondents sent
a demand letter asking petitioner to sell the collateral
pursuant to the option to buy embodied in the loan
agreement.
On the other hand, on March 5, 1990, petitioner led
in the Regional Trial Court, Quezon City a petition for
consignation, and deposited the amount of P153,000.00
with the City Treasurer of Quezon City on August 10,
1990. 7
When petitioner refused to sell the collateral and
barangay conciliation failed, respondents consigned the
amount of P47,500.00 with the trial court. 8 In arriving at
the amount deposited, respondent considered the
principal loan of P100,000.00 and 18% interest per annum
thereon, which amounted to P52,500.00. 9 The principal
lot and the interest taken together amounted to
P152,500.00, leaving balance of P47,500.00. 10
After due trial, on November 10, 1992, the trial
court rendered decision holding:
"WHEREFORE, premises
considered, judgment is hereby rendered as
follows:
"1. Denying the plaintiff's prayer for
the defendants' execution of the Deed of
Sale to Convey the collateral in plaintiffs'
favor;
"2. Ordering the defendants to pay the
loan of P100,000.00 with interest thereon at
18% per annum commencing on March 2,
1989, up to and until August 10, 1990, when
defendants deposited the amount with the O
ce of the City Treasurer under Official
Receipt No. 0116548 (Exhibit "2"); and
"3. To pay Attorney's Fees in the amount of
P5,000.00, plus costs of suit.
"SO ORDERED. Cdasia
"Quezon City, Philippines, November 10,
1992.
"TEODORO P. REGINO
"Judge" 11
On November 16, 1992, respondents appealed
from the decision to the Court of Appeals. 12 On July 8,
1996, the Court of Appeals rendered decision reversing
the ruling of the Regional Trial Court. The dispositive
portion of the Court of Appeals' decision reads:
"IN VIEW OF THE FOREGOING, the
judgment appeal (sic) from is REVERSED
and SET ASIDE and a new one entered in
favor of the plaintiffs ordering the defendants
to accept the amount of P47,000.00
deposited with the Clerk of Court of Regional
Trial Court of Quezon City under O cial
Receipt No. 0719847, and for defendants to
execute the necessary Deed of Sale in favor
of the plaintiffs over the 70 SQUARE METER
portion and the apartment standing thereon
 being occupied by the plaintiffs and covered
by TCT No. 80667 within
fteen (15) days from nality hereof.
Defendants, in turn, are allowed to withdraw
the amount of P153,000.00 deposited by
them under O cial Receipt No. 0116548 of
the City Treasurer's O ce of Quezon City. All
other claims and counterclaims are
DISMISSED, for lack of sufficient basis. No
costs.
"SO ORDERED." 13
Hence, this petition. 14
On January 20, 1997, we required respondents to
comment on the petition within ten (10) days from notice.
15 On February 27, 1997 respondents filed their comment.
16
On February 9, 1998, we resolved to deny the
petition on the ground that there was no reversible error
on the part of respondent court in ordering the execution
of the necessary deed of sale in conformity with the
parties' stipulated agreement. The contract is the law
between the parties thereof (Syjuco v. Court of Appeals,
172 SCRA 111, 118, citing Phil. American General
Insurance v. Mutuc, 61 SCRA 22; Herrera v. Petrophil
Corporation, 146 SCRA 360). 17
On March 17, 1998, petitioner led with this Court a
motion for reconsideration of the denial alleging that the
real intention of the parties to the loan was to put up the
collateral as guarantee similar to as equitable mortgage
according to Article 1602 of the Civil Code. 18
On April 21, 1998, respondents led an opposition to
petitioner's motion for reconsideration. They contend that
the agreement between the parties was not a sale with
right of re-purchase, but a loan with interest at 18% per
annum for a period of two years and if petitioner fails to
pay, the respondent was given the right to purchase the
property or apartment for P200,000.00, which is not
contrary to law, morals, good customs, public order or
public policy. 19
Upon due consideration of petitioner's motion, we
now resolve to grant the motion for reconsideration.
The questions presented are whether petitioner
failed to pay the loan at its maturity date and whether the
stipulation in the loan contract was valid and enforceable.
We rule that petitioner did not fail to pay the loan.
The loan was due for payment on March 1, 1989.
On said date, petitioner tendered payment to settle the
loan which respondents refused to accept, insisting that
petitioner sell to them the collateral of the loan.
When respondents refused to accept payment,
petitioner consigned the amount with the trial court.
We note the eagerness of respondents to acquire
the property given as collateral to guarantee the loan.
The sale of the collateral is an obligation with a
suspensive condition.
6. It is dependent upon the happening of an event,
without which the obligation to sell does not arise. Since
the event did not occur, respondents do not have the right
to demand ful llment of petitioner's obligation, especially
where the same would not only be disadvantageous to
petitioner but would also unjustly enrich respondents
considering the inadequate consideration (P200,000.00)
for a 70 square meter property situated at Congressional
Avenue, Quezon City.
Respondents argue that contracts have the force of
law between the contracting parties and must be complied
with in good faith. 21 There are, however, certain
exceptions to the rule, specifically Article 1306 of the Civil
Code, which provides:
"ARTICLE 1306. The contracting
parties may establish such stipulations,
clauses, terms and conditions as they may
deem convenient, provided they are not
contrary to law, morals, good customs, public
order, or public policy."prcd
A scrutiny of the stipulation of the parties reveals a
subtle intention of the creditor to acquire the property
given as security for the loan. This is embraced in the
concept of pactum commissorium, which is proscribed by
law. 22
"The elements of pactum commissorium are as
follows: (1) there should be a property mortgaged by way
of security for the payment of the principal obligation, and
(2) there should be a stipulation automatic appropriation
by the creditor of the thing mortgaged in case of non-
payment of the principal obligation within the stipulated
period."
23
In Nakpil vs. Intermediate Appellate Court, 24 we
said:
"The arrangement entered into
between the parties, whereby Pulong
Maulap was to be "considered sold to him
(respondent) . . . in case petitioner fails to
reimburse Valdes, must then be construed
as tantamount to pactum commissorium
which is expressly prohibited by Art. 2088 of
the Civil Code. For, there was to be
automatic appropriation of the property by
Valdes in the event of failure of petitioner to
pay the value of the advances. Thus,
contrary to respondent's manifestation, all
the elements of a pactum commissorium
were present: there was a creditor-debtor
relationship between the parties; the
property was used as security for the loan;
and there was automatic appropriation by
respondent of Pulong Maulap in case of
default of petitioner."
A signi cant task in contract interpretation is the
ascertainment of the intention of the parties and looking
into the words used by the parties to project that intention.
In this case, the intent to appropriate the property given
as collateral in favor of the creditor appears to be evident,
for the debtor is obliged to dispose of the collateral at the
pre-agreed consideration amounting to practically the
same amount as the loan. In effect, the creditor acquires
the collateral in the event of non-payment of the loan. This
is within the concept of pactum commissorium. Such
stipulation is void. 25
All persons in need of money are liable to enter into
contractual relationships whatever the condition if only to
alleviate their nancial burden albeit temporarily. Hence,
courts are duty bound to exercise caution in the SECOND DIVISION
interpretation and resolution of contracts lest the lenders
devour the borrowers like vultures do with their prey. [G.R. No. 172592. July 9, 2008.]

WHEREFORE, we GRANT petitioner's motion for SPOUSES WILFREDO N. ONG and

reconsideration and SET ASIDE the Court's resolution of EDNA SHEILA PAGUIO-ONG ,
February 9, 1998. We REVERSE the decision of the Court petitioners, vs. ROBAN LENDING
of Appeals in CA-G.R. CV No. 40193. In lieu thereof, we CORPORATION, respondent.
hereby DISMISS the complaint in Civil Case No. Q-90-
4813.
No costs. DECISION

SO ORDERED. LLphil

CARPIO-MORALES, J : p

Davide, Jr., C.J., Puno, Kapunan and Ynares-

Santiago, JJ., concur. On different dates from July 14, 1999 to March
20, 2000, petitioner-spouses Wilfredo N. Ong and
Edna Sheila Paguio-Ong obtained several loans from
Roban Lending Corporation (respondent) in the total
amount of P4,000,000.00. These loans were secured
by a real estate mortgage on petitioners' parcels of
land located in Binauganan, Tarlac City and covered
by TCT No. 297840. 1
On February 12, 2001, petitioners and
respondent executed an Amendment to Amended
Real Estate Mortgage 2 consolidating their loans
inclusive of charges thereon which totaled
P5,916,117.50. On even date, the parties executed a
Dacion in Payment Agreement 3 wherein petitioners
assigned the properties covered by TCT No. 297840
to respondent in settlement of their total obligation, and
a Memorandum of Agreement
7. reading:AIaSTE
 That the FIRST PARTY [Roban
Lending Corporation] and the SECOND
PARTY [the petitioners] agreed to
consolidate and restructure all
aforementioned loans, which have been all
past due and delinquent since April 19, 2000,
and outstanding obligations totaling
P5,916,117.50. The SECOND PARTY
hereby sign [sic] another promissory note in
the amount of P5,916,117.50 (a copy of
which is hereto attached and forms . . . an
integral part of this document), with a
promise to pay the FIRST PARTY in full
within one year from the date of the
consolidation and restructuring, otherwise
the SECOND PARTY agree to have their
"DACION IN PAYMENT" agreement, which
they have executed and signed today in favor
of the FIRST PARTY be enforced[.]
5
In April 2002 (the day is illegible), petitioners led
a Complaint, 6 docketed as Civil Case No. 9322,
before the Regional Trial Court (RTC) of Tarlac City,
for declaration of mortgage contract as abandoned,
annulment of deeds, illegal exaction, unjust
enrichment, accounting, and damages, alleging that
the Memorandum of Agreement and the Dacion in
Payment executed are void for being pactum
commissorium. 7
Petitioners alleged that the loans extended to
them from July 14, 1999 to March 20, 2000 were
founded on several uniform promissory notes, which
provided for 3.5% monthly interest rates, 5% penalty
per month on the total amount due and demandable,
and a further sum of 25% attorney's fees thereon, 8 and
in addition, respondent exacted certain sums
denominated as "EVAT/AR". 9 Petitioners decried
these additional charges as "illegal, iniquitous,
unconscionable, and revolting to the conscience as
they hardly allow any borrower any chance of survival
in case of default." 10
Petitioners further alleged that they had previously made
payments on their loan accounts, but because of the
illegal exactions thereon, the total balance appears not
to have moved at all, hence, accounting was in order. 11
Petitioners thus prayed for judgment:
' Declaring the Real Estate Mortgage
Contract and its amendments . . .
as null and void and without legal force
and effect for having been renounced,
abandoned, and given up;
' Declaring the "Memorandum of
Agreement" . . . and "Dacion in Payment" .
. . as null and void for being pactum
commissorium;
' Declaring the interests,
penalties, Evat [sic] and attorney's fees
assessed and loaded into the loan
accounts of the plaintiffs with defendant as
unjust, iniquitous, unconscionable and
illegal and therefore, stricken out or set
aside;
' Ordering an accounting on
plaintiffs' loan accounts to determine the
true and correct balances on their
obligation against legal charges only; and
 ' Ordering defendant to [pay] to the
plaintiffs: —
e.1 Moral damages in an amount not
less than P100,000.00 and
exemplary damages of P50,000.00;
e.2 Attorney's fees in the amount of
P50,000.00 plus P1,000.00
appearance fee per hearing; and
e.3 The cost of suit. 12
as well as other just and equitable reliefs.
In its Answer with Counterclaim, 13 respondent
maintained the legality of its transactions with
petitioners, alleging that:
CaEIST
xxx xxx xxx
If the voluntary execution of the
Memorandum of Agreement and Dacion in
Payment Agreement novated the Real
Estate Mortgage then the allegation of
Pactum Commissorium has no more legal
leg to stand on;
The Dacion in Payment Agreement is lawful
and valid as it is recognized
" . . under Art. 1245 of the Civil Code as a
special form of payment whereby the
debtor-Plaintiffs alienates their property to
the creditor-Defendant in satisfaction of
their monetary obligation;
The accumulated interest and other
charges which were computed for more
than two (2) years would stand reasonable
and valid taking into consideration [that] the
principal loan is P4,000,000 and if indeed it
became beyond the Plaintiffs' capacity to
pay then the fault is attributed to them and
not the Defendant[.] 14
After pre-trial, the initial hearing of the case,
originally set on December 11, 2002, was reset several
times due to, among other things, the parties' efforts to
settle the case amicably. 15
During the scheduled initial hearing of May 7,
2003, the RTC issued the following order:
Considering that the plaintiff Wilfredo Ong
is not around on the ground that he is in Manila
and he is attending to a very sick relative, without
objection on the part of the defendant's counsel,
the initial hearing of this case is reset to June 18,
2003 at 10:00 o'clock in the morning.
Just in case [plaintiff's counsel] Atty.
Concepcion cannot present his witness in
the person of Mr. Wilfredo Ong in the next
scheduled hearing, the counsel manifested
that he will submit the case for summary
judgment. 16 (Underscoring supplied)
It appears that the June 18, 2003 setting was
eventually rescheduled to February 11, 2004 at which
both counsels were present 17 and the RTC issued the
following order:
The counsel[s] agreed to reset this
case on April 14, 2004, at 10:00 o'clock in
the morning. However, the counsels are
directed to be ready with their memorand[a]
together with all the exhibits or evidence
 needed to support their respective
positions which should be the basis for the
judgment on the pleadings if the parties fail
to settle the case in the next scheduled
setting. ESTCHa
xxx xxx xxx 18 (Underscoring supplied)
At the scheduled April 14, 2004 hearing, both
counsels appeared but only the counsel of respondent
filed a memorandum. 19
By Decision of April 21, 2004, Branch 64 of the
Tarlac City RTC, nding on the basis of the pleadings
that there was no pactum commissorium, dismissed
the complaint. 20
On appeal, 21 the Court of Appeals 22 noted that:
. . . [W]hile the trial court in its
decision stated that it was rendering
judgment on the pleadings, . . . what it
actually rendered was a summary judgment.
A judgment on the pleadings is proper when
the answer fails to tender an issue, or
otherwise admits the material allegations of
the adverse party's pleading. However, a
judgment on the pleadings would not have
been proper in this case as the answer
tendered an issue, i.e. the validity of the MOA
and DPA. On the other hand, a summary
judgment may be rendered by the court if the
pleadings, supporting a davits, and other
documents show that, except as to the
amount of damages, there is no genuine
issue as to any material fact.
23
Nevertheless, nding the error in nomenclature
"to be mere semantics with no bearing on the merits of
the case", 24 the Court of Appeals upheld the RTC
decision that there was no pactum commissorium. 25
Their Motion for Reconsideration 26 having been
denied, 27 petitioners led the instant Petition for
Review on Certiorari, 28 faulting the Court of Appeals
for having committed a clear and reversible error:
I. . . . WHEN IT FAILED AND
REFUSED TO APPLY PROCEDURAL
REQUISITES WHICH WOULD WARRANT
THE SETTING ASIDE OF THE SUMMARY
JUDGMENT IN VIOLATION OF
APPELLANTS' RIGHT TO DUE
PROCESS;
II. . . . WHEN IT FAILED TO
CONSIDER THAT TRIAL IN THIS CASE
IS NECESSARY BECAUSE THE FACTS
ARE VERY MUCH IN DISPUTE;
III. . . . WHEN IT FAILED AND
REFUSED TO HOLD THAT THE
MEMORANDUM OF AGREEMENT (MOA)
AND THE DACION EN PAGO
AGREEMENT (DPA) WERE DESIGNED
TO CIRCUMVENT THE LAW AGAINST
PACTUM COMMISSORIUM; and
IV. . . . WHEN IT FAILED TO CONSIDER THAT THE
MEMORANDUM OF AGREEMENT (MOA) AND THE
DACION EN PAGO (DPA) ARE NULL AND VOID FOR
BEING CONTRARY TO LAW AND PUBLIC
POLICY. 29
The petition is meritorious.
 Both parties admit the execution and contents
of the Memorandum of Agreement and Dacion in
Payment. They differ, however, on whether both
contracts constitute pactum commissorium or dacion
en pago. cAIDEa
This Court nds that the Memorandum of
Agreement and Dacion in Payment constitute pactum
commissorium, which is prohibited under Article 2088
of the Civil Code which provides:
The creditor cannot appropriate the
things given by way of pledge or
mortgage, or dispose of them. Any
stipulation to the contrary is null and void."
The elements of pactum commissorium, which
enables the mortgagee to acquire ownership of the
mortgaged property without the need of any
foreclosure proceedings, 30 are: (1) there should be a
property mortgaged by way of security for the payment
of the principal obligation, and (2) there should be a
stipulation for automatic appropriation by the creditor
of the thing mortgaged in case of non-payment of the
principal obligation within the stipulated period. 31
In the case at bar, the Memorandum of
Agreement and the Dacion in Payment contain no
provisions for foreclosure proceedings nor redemption.
Under the Memorandum of Agreement, the failure by
the petitioners to pay their debt within the one-year
period gives respondent the right to enforce the Dacion
in Payment transferring to it ownership of the
properties covered by TCT No. 297840. Respondent,
in effect, automatically acquires ownership of the
properties upon petitioners' failure to pay their debt
within the stipulated period.
ASEIDH
Respondent argues that the law recognizes
dacion en pago as a special form of payment whereby
the debtor alienates property to the creditor in
satisfaction of a monetary obligation. 32 This does not
persuade. In a true dacion en pago, the assignment of
the property extinguishes the monetary debt. 33 In the
case at bar, the alienation of the properties was by way
of security, and not by way of satisfying the debt. 34
The Dacion in Payment did not extinguish petitioners'
obligation to respondent. On the contrary, under the
Memorandum of Agreement executed on the same
day as the Dacion in Payment, petitioners had to
execute a promissory note for P5,916,117.50 which
they were to pay within one year. 35
Respondent cites Solid Homes, Inc. v. Court of
Appeals 36 where this Court upheld a Memorandum of
Agreement/Dacion en Pago. 37 That case did not
involve the issue of pactum commissorium. 38
That the questioned contracts were freely and
voluntarily executed by petitioners and respondent is
of no moment, pactum commissorium being void for
being prohibited by law. 39
Respecting the charges on the loans, courts
may reduce interest rates, penalty charges, and
attorney's fees if they are iniquitous or unconscionable.
40
This Court, based on existing jurisprudence, 41 nds the
monthly interest rate of 3.5%, or 42% per annum
unconscionable and thus reduces it to 12% per
annum. This Court nds too the penalty fee at the
monthly rate of 5% (60% per annum) of the total
amount due and demandable — principal plus interest,
with interest not paid when due added to and
becoming part of the principal and likewise bearing
interest at the same rate, compounded monthly 42 —
unconscionable and reduces it to a yearly rate of 12%
of the amount due, to be computed from the time of
demand. 43 This Court nds the attorney's fees of 25%
of the principal, interests and interests thereon, and
the penalty fees unconscionable, and thus reduces the
attorney's fees to 25% of the principal amount only. 44
The prayer for accounting in petitioners'
complaint requires presentation of evidence, they
claiming to have made partial payments on their loans,
vis a vis respondent's denial thereof. 45 A remand of
the case is thus in order.TDCAIS
Prescinding from the above disquisition, the trial
court and the Court of Appeals erred in holding that a
summary judgment is proper. A summary judgment is
permitted only if there is no genuine issue as to any
material fact and a moving party is entitled to a
judgment as a matter of law. 46 A summary judgment
is proper if, while the pleadings on their face appear to
raise issues, the a davits, depositions, and admissions
presented by the moving party show that such issues
are not genuine. 47 A genuine issue, as opposed to a
ctitious or contrived one, is an issue of fact that
requires the presentation of evidence. 48 As mentioned
above, petitioners' prayer for accounting requires the
presentation of evidence on the issue of partial
payment.
But neither is a judgment on the pleadings
proper. A judgment on the pleadings may be rendered
only when an answer fails to tender an issue or
otherwise admits the material allegations of the
adverse party's pleadings. 49 In the case at bar,
respondent's Answer with Counterclaim disputed
petitioners' claims that the Memorandum of Agreement
and Dation in Payment are illegal and that the extra
charges on the loans are unconscionable. 50
Respondent disputed too petitioners' allegation of bad
faith. 51
WHEREFORE, the challenged Court of Appeals
Decision is REVERSED and SET ASIDE. The
Memorandum of Agreement and the Dacion in
Payment executed by petitioner — spouses Wilfredo
N. Ong and Edna Sheila Paguio- Ong and respondent
Roban Lending Corporation on February 12, 2001 are
declared NULL AND VOID for being pactum
commissorium. ECDAcS
In line with the foregoing ndings, the following
terms of the loan contracts between the parties are
MODIFIED as follows:
1. The monthly interest rate of
3.5%, or 42% per annum, is reduced to
12% per annum;
2. The monthly penalty fee of 5%
of the total amount due and demandable
is reduced to 12% per annum, to be
computed from the time of demand; and
3. The attorney's fees are reduced to 25%
of the principal amount
only. cHCaIE
Civil Case No. 9322 is REMANDED to the
court of origin only for the purpose of receiving
evidence on petitioners' prayer for accounting.
SO ORDERED. THIRD DIVISION
Quisumbing, Tinga, Velasco, Jr. and
Brion, JJ., concur. [G.R. No. 132287. January 24, 2006.]

SPOUSES BONIFACIO and FAUSTINA

PARAY, and VIDAL ESPELETA,
petitioners, vs. DRA. ABDULIA C.
RODRIGUEZ, MIGUELA R. JARIOL
assisted by her husband ANTOLIN
JARIOL, SR., LEONORA NOLASCO
assisted by her husband FELICIANO
NOLASCO, DOLORES SOBERANO
assisted by her husband JOSE
SOBERANO, JR., JULIA R.
GENEROSO, TERESITA R. NATIVIDAD
and GENOVEVA R. SORONIO assisted
by her husband ALFONSO SORONIO,
respondents.

Diores Law Office for petitioners.

Florido & Associates for Heirs of Dra. A.
Rodriguez.
Gregorio B. Escasinas for D. Soberano.
Mario Ortiz for Sps. Jarol.

SYLLABUS

1. CIVIL LAW; PLEDGE; EXTRAJUDICIAL

SALE OF PLEDGED PROPERTY DISTINGUISHED
FROM JUDICIAL SALE. — Preliminary, it must be clari ed
that the subject sale of pledged shares was an
extrajudicial sale, speci cally a notarial sale, speci cally a
notarial sale, as distinguished from a judicial sale as typi
ed by an execution sale. Under the Civil Code, the
foreclosure of a pledge occurs extrajudicially, without
intervention by the courts. All the creditor needs to do, if
the credit has not been satis ed in due time, is to proceed
before a Notary Public to the sale of the thing pledged.
2. ID.; ID.; THERE IS NO LAW WHICH VESTS
THE RIGHT OF REDEMPTION OVER PERSONAL
PROPERTY SOLD EXTRAJUDICIALLY; JUSTIFIED. —
The right of redemption as a rmed under Rule 39 of the
Rules of Court applies only to execution sales, more
precisely execution sales of real property. The right to
redeem property sold as security for the satisfaction of an
unpaid obligation does not exist preternaturally. Neither is
it predicated on proprietary right, which, after the sale of
property on execution, leaves the judgment debtor and
vests in the purchaser. Instead, it is a bare statutory
privilege to be exercised only by the persons named in the
statute. The right of redemption over mortgaged real
property sold extrajudically is established by Act No. 3135,
as amended. The said law does not extend the same bene
t to personal property. In fact, there is no law in our statute
books which vests the right of redemption over personal
property. Act No. 1508, or the Chattel Mortgage Law,
ostensibly could have served as the vehicle for any
legislative intent to bestow a right of redemption over
personal property, since that law governs the extrajudicial
sale of mortgaged personal property, but the statute is de
nitely silent on the point. Obviously, since there is no right
to redeem personal property, the rights of ownership
vested unto the purchaser at the foreclosure sale are not
entangled in any suspensive condition that is implicit in a
redemptive period.
ID.; ID.; EXTRAJUDICIAL SALE OF PLEDGED PROPERTY;
CONDUCT IN CASE TWO OR MORE THINGS ARE
PLEDGED, EXPLAINED. — Under the Civil Code, it is the
pledgee, and not the pledgor, who is given the right to
choose which of the items should be sold if two or more
things are pledged. No similar option is given to pledgors
under the Civil Code. Moreover, there is nothing in the
Civil Code provisions governing the extrajudicial sale of
pledged properties that prohibits the pledges of several
different pledge contracts from auctioning all of the
pledged properties on a single occasion, or from the buyer
at the auction sale in purchasing all the pledged properties
with a single purchase price. The relative insigni cance of
ascertaining the de nite apportionments of the sale price
to the individual shares lies in the fact that once a pledged
item is sold at auction, neither the pledgee nor the pledgor
can recover whatever de ciency or excess there may be
between the purchase price and the amount of the
principal obligation. A different ruling though would obtain
if at the auction, a bidder expressed the desire to bid on a
determinate number or portion of the pledged shares. In
such a case, there may lie the need to ascertain with
particularity which of the shares are covered by the bid
price, since not all of the shares may be sold at the auction
and correspondingly not all of the pledge contracts
extinguished. The same situation also would lie if one or
some of the owners of the pledged shares participated in
the auction, bidding only on their respective pledged
shares.
 4. ID.; ID.; RIGHT OF CREDITOR TO RETAIN secured by way of pledge of some of their shares of stock
POSSESSION OF PLEDGED ITEM EXISTS ONLY to petitioners Bonifacio and Faustina Paray ("Parays") the
UNTIL THE DEBT IS PAID. — There is no doubt that if payment of certain loan obligations. The shares pledged
the principal obligation is satis ed, the pledges should be are listed below:
terminated as well. Article 2098 of the Civil Code provides Miguel Rodriguez Jariol 1,000 shares covered by Stock
that the right of the creditor to retain possession of the Certificates No. 011, 060, 061 &
pledged item exists only until the debt is paid. Article 2105 062;
of the Civil Code further clari es that the debtor cannot ask 300 shares covered by Stock
for the return of the thing pledged against the will of the Abdulia C. Rodriguez Certificates
creditor, unless and until he has paid the debt and its
No. 023 & 093;
interest. At the same time, the right of the pledgee to
407 shares covered by Stock
foreclose the pledge is also established under the Civil Leonora R. Nolasco Certificates
Code. When the credit has not been satis ed in due time, No. 091 & 092;
the creditor may proceed with the sale by public auction 699 shares covered by Stock
under the procedure provided under Article 2112 of the Genoveva Soronio Certificates
Code. No. 025, 059 & 099;
699 shares covered by Stock
Dolores R. Soberano Certificates
No. 021, 053, 022 & 097;
Julia Generoso 1,100 shares covered by Stock
DECISION Certificates No. 085, 051, 086 & 084;
440 shares covered by Stock
Teresita Natividad Certificates
TINGA, J :p

When the Parays attempted to foreclose the pledges

The assailed decision of the Court of Appeals took
off on the premise that pledged shares of stock auctioned
off in a notarial sale could still be redeemed by their
owners. This notion is wrong, and we thus reverse.
The facts, as culled from the record, follow.
Respondents were the owners, in their respective
personal capacities, of shares of stock in a corporation
known as the Quirino-Leonor-Rodriguez Realty Inc. 1
Sometime during the years 1979 to 1980, respondents
on account of respondents’ failure to pay their loans,
respondents filed complaints with the Regional Trial Court
(RTC) of Cebu. The actions. Which were consolidated and
tried before RTC Brach 14, Cebu City, sought the
declaration of nullity of the pledge agreements, among
others. However the RTC, in its decision 3 dated 14
October 1988, dismissed the complaint and gave "due
course to the foreclosure and sale at public auction of the
various pledges subject of these two cases." 4 This
decision attained nality after it was a rmed by the Court of
Appeals and the Supreme Court. The Entry of Judgment respondents participated or appeared at the auction of 4
was issued on 14 August 1991. AISHcD November 1991.
Respondents then received Notices of Sale which Respondents instead led on 13 November 1991 a
indicated that the pledged shares were to be sold at public complaint seeking the declaration of nullity of the
auction on 4 November 1991. However, before the concluded public auction. The complaint, docketed as
scheduled date of auction, all of respondents caused the Civil Case No. CEB-10926, was assigned to Branch 16 of
consignation with the RTC Clerk of Court of various the Cebu City RTC. Respondents argued that their tender
amounts. It was claimed that respondents had attempted of payment and subsequent consignations served to
to tender these payments to the Parays, but had been extinguish their loan obligations and discharged the
rebuffed. The deposited amounts were as follows: pledge contracts. Petitioners countered that the auction
sale was conducted pursuant to the nal and executory
Abdulia C. P120,066. 14 Oct.
Rodriguez 66 1991 judgment in Civil Cases Nos. R-20120 and 20131, and
Leonora R. 277,381.8 14 Oct. that the tender of payment and consignations were made
Nolasco 2 1991 long after their obligations had fallen due.
Genoveva R. 425,353.5 14 Oct. The Cebu City RTC dismissed the complaint, expressing
Soronio 0 1991
agreement with the position of the Parays. 6 It held, among
14 Oct.
38,385.44 1991 others that respondents had failed to tender or consign
Julia R. 638,385.0 25 Oct. payments within a reasonable period after default and that
Generoso 0 1991 the proper remedy of respondents was to have
Teresita R. 264,375.0 11 Nov. participated in the auction sale. 7 The Court of Appeals
Natividad 0 1991 Eighth Division however reversed the RTC on appeal,
Dolores R. 25 Oct. ruling that the consignations extinguished the loan
Soberano 12,031.61 1991 obligations and the subject pledge contracts; and the
520,216.3 11 Nov. auction sale of 4 November 1991 as null and void. 8 Most
9 1991 crucially, the appellate court chose to uphold the su ciency
490,000.0 18 Oct. of the consignations owing to an imputed policy of the law
Miguela Jariol 0 1991
that favored redemption and mandated a liberal
18 Oct.
88,000.00 1991 5
construction to redemption laws. The attempts at payment
by respondents were characterized as made in the
Notwithstanding the consignations, the public exercise of the right of redemption.
auction took place as scheduled, with petitioner Vidal
Espeleta successfully bidding the amount of The Court of Appeals likewise found fault with the
P6,200,000.00 for all of the pledged shares. None of auction sale, holding that there was a need to individually
sell the various shares of stock as they had belonged to
different pledgors. Thus, it was observed that the minutes
of the auction sale should have speci ed in detail the bids
submitted for each of the shares of the pledgors for the
purpose of knowing the price to be paid by the different
pledgors upon redemption of the auctioned sales of stock.
Petitioners now argue before this Court that they were
authorized to refuse as they did the tender of payment
since they were undertaking the auction sale pursuant to
the nal and executory decision in Civil Cases Nos. R-
20120 and 20131, which did not authorize the payment
of the principal obligation by respondents. They point out
that the amounts consigned could not extinguish the
principal loan obligations of respondents since they were
not su cient to cover the interests due on the debt. They
likewise argue
that the essential procedural requisites for the auction
sale had been satisfied.
We rule in favor of petitioners.
The fundamental premise from which the appellate
court proceeded was that the consignations made by
respondents should be construed in light of the rules of
redemption, as if respondents were exercising such right.
In that perspective, the Court of Appeals made three
crucial conclusions favorable to respondents: that their act
of consigning the payments with the RTC should be
deemed done in the exercise of their right of redemption;
that the buyer at public auction does not ipso facto
become the owner of the pledged shares pending the
lapse of the one -year redemptive period; and that the
collective sale of the shares of stock belonging to several
individual owners without speci cation of the
apportionment in the applications of payment deprives the
individual owners of the opportunity to know of the price
they would have to pay for the purpose of exercising the
right of redemption. HDITCS
The appellate court's dwelling on the right of
redemption is utterly off-tangent. The right of redemption
involves payments made by debtors after the foreclosure
of their properties, and not those made or attempted to be
made, as in this case, before the foreclosure sale. The
proper focus of the Court of Appeals should have been
whether the consignations made by respondents su
ciently acquitted them of their principal obligations. A
pledge contract is an accessory contract, and is
necessarily discharged if the principal obligation is
extinguished.
Nonetheless, the Court is now confronted with this
rather new fangled theory, as propounded by the Court of
Appeals, involving the right of redemption over pledged
properties. We have no hesitation in pronouncing such
theory as discreditable.
Preliminarily, it must be clari ed that the subject sale of
pledged shares was an extrajudicial sale, speci cally a
notarial sale, as distinguished from a judicial sale as typi
ed by an execution sale. Under the Civil Code, the
foreclosure of a pledge occurs extrajudicially, without
intervention by the courts. All the creditor needs to do, if
the credit has not been satis ed in due time, is to proceed
before a Notary Public to the sale of the thing pledged. 9
In this case, petitioners attempted as early as 1980
to proceed extrajudicially with the sale of the pledged
shares by public auction. However, extrajudicial sale was
stayed with the ling of Civil Cases No. R-20120 and
20131, which sought to annul the pledge contracts. The
nal and executory judgment in those cases a rmed the
pledge contracts and disposed them in the following
fashion:
WHEREFORE, premises considered,
judgment is hereby rendered dismissing the
complaints at bar, and —
(1)Declaring the various pledges
covered in Civil Cases Nos. R-20120 and
R-20131 valid and effective; and
(2)Giving due course to the
foreclosure and sale at public auction of the
various pledges subject of these two cases.
Costs against the plaintiffs.
SO ORDERED. 10
The phrase "giving due course to the foreclosure
and sale at public auction of the various pledges subject
of these two cases" may give rise to the impression that
such sale is judicial in character. While the decision did
authorize the sale by public auction, such declaration
could not detract from the fact that the sale so authorized
is actually extrajudicial in character. Note that the nal
judgment in said cases expressly did not direct the sale
by public auction of the pledged shares, but instead
upheld the right of the Parays to conduct such sale at their
own volition.
Indeed, as a rmed by the Civil Code, 11 the decision
to proceed with the sale by public auction remains in the
sole discretion of the Parays, who could very well choose
not to hold the sale without violating the nal judgments in
the aforementioned civil cases. If the sale were truly in
compliance with a nal judgment or order, the Parays
would have no choice but to stage the sale for then the
order directing the sale arises from judicial compulsion.
But nothing in the dispositive portion directed the sale at
public auction as a mandatory recourse, and properly so
since the sale of pledged property in public auction is, by
virtue of the Civil Code, extrajudicial in character.
The right of redemption as a rmed under Rule 39 of
the Rules of Court applies only to execution sales, more
precisely execution sales of real property.
The Court of Appeals expressly asserted the notion
that pledged property, necessarily personal in character,
may be redeemed by the creditor after being sold at public
auction. Yet, as a fundamental matter, does the right of
redemption exist over personal property? No law or
jurisprudence establishes or a rms such right. Indeed, no
such right exists.
The right to redeem property sold as security for the
satisfaction of an unpaid obligation does not exist
preternaturally. Neither is it predicated on proprietary right,
which, after the sale of property on execution, leaves the
judgment debtor and vests in the purchaser. Instead, it is
a bare statutory privilege to be exercised only by the
persons named in the statute. 12
The right of redemption over mortgaged real
property sold extrajudicially is established by Act No.
3135, as amended. The said law does not extend the
same bene t to personal property. In fact, there is no law
in our statute books which vests the right of redemption
over personal property. Act No. 1508, or the Chattel
Mortgage Law, ostensibly could have served as the
vehicle for any legislative intent to bestow a right of
redemption over personal property, since that law governs
the extrajudicial sale of mortgaged personal property, but
the statute is de nitely silent on the point. And Section 39
of the 1997 Rules of Civil Procedure, extensively relied
upon by the Court of Appeals, starkly utters that the right
of redemption applies to real properties, not personal
properties, sold on execution.
Tellingly, this Court, as early as 1927, rejected the
proposition that personal property may be covered by the
right of redemption. In Sibal 1.º v. Valdez, 13 the Court
ruled that sugar cane crops are personal property, and
thus, not subject to the right of redemption.
14 No countervailing statute has been enacted since then
that would accord the right of
redemption over personal property, hence the Court can
a rm this decades-old ruling as effective to date.
cdtai
Since the pledged shares in this case are not
subject to redemption, the Court of Appeals had no
business invoking and applying the inexistent right of
redemption. We cannot thus agree that the consigned
payments should be treated with liberality, or somehow
construed as having been made in the exercise of the right
of redemption. We also must reject the appellate court's
declaration that the buyer of at the public auction is not
"ipso facto" rendered the owner of the auctioned shares,
since the debtor enjoys the one-year redemptive period to
redeem the property. Obviously, since there is no right to
redeem personal property, the rights of ownership vested
unto the purchaser at the foreclosure sale are not
entangled in any suspensive condition that is implicit in a
redemptive period.
The Court of Appeals also found fault with the
apparent sale in bulk of the pledged shares,
notwithstanding the fact that these shares were owned by
several people, on the premise the pledgors would be
denied the opportunity to know exactly how much they
would need to shoulder to exercise the right to
redemption. This concern is obviously rendered a non-
issue by the fact that there can be no right to redemption
in the rst place. Rule 39 of the Rules of Court does provide
for instances when properties foreclosed at the same time
must be sold separately, such as in the case of lot sales
for real property under Section 19. However, these
instances again pertain to execution sales and not
extrajudicial sales. No provision in the Rules of Court or in
any law requires that pledged properties sold at auction
be sold separately.
On the other hand, under the Civil Code, it is the pledgee,
and not the pledgor, who is given the right to choose
which of the items should be sold if two or more things are
pledged. 15 No similar option is given to pledgors under
the Civil Code. Moreover, there is nothing in the Civil
Code provisions governing the extrajudicial sale of
pledged properties that prohibits the pledgee of several
different pledge contracts from auctioning all of the
pledged properties on a single occasion, or from the buyer
at the auction sale in purchasing all the pledged
properties with a single purchase price. The relative
insignificance of ascertaining the definite apportionments
of the sale price to the individual shares lies in the fact
that once a pledged item is sold at auction, neither the
pledgee nor the pledgor can recover whatever de ciency
or excess there may be between the purchase price and
the amount of the principal obligation. 16
A different ruling though would obtain if at the
auction, a bidder expressed the desire to bid on a
determinate number or portion of the pledged shares. In
such a case, there may lie the need to ascertain with
particularity which of the shares are covered by the bid
price, since not all of the shares may be sold at the auction
and correspondingly not all of the pledge contracts
extinguished. The same situation also would lie if one or
some of the owners of the pledged shares participated in
the auction, bidding only on their respective pledged
shares. However, in this case, none of the pledgors
participated in the auction, and the sole bidder cast his bid
for all of the shares. There obviously is no longer any
practical reason to apportion the bid price to the
respective shares, since no matter how slight or signi cant
the value of the purchase price for the individual share is,
the sale is completed, with the pledgor and the pledgee
not entitled to recover the excess or the de ciency, as the
case may be. To invalidate the subject auction solely on
this point serves no cause other than to celebrate formality
for formality's sake.
Clearly, the theory adopted by the Court of Appeals
is in shambles, and cannot be resurrected. The question
though yet remains whether the consignations made by
respondents extinguished their respective pledge
contracts in favor of the Parays so as to enjoin the latter
from auctioning the pledged shares.
There is no doubt that if the principal obligation is
satis ed, the pledges should be terminated as well. Article
2098 of the Civil Code provides that the right of the
creditor to retain possession of the pledged item exists
only until the debt is paid. Article 2105 of the Civil Code
further clari es that the debtor cannot ask for the return of
the thing pledged against the will of the creditor, unless
and until he has paid the debt and its interest. At the same
time, the right of the pledgee to foreclose the pledge is
also established under the Civil Code. When the credit
has not been satis ed in due time, the creditor may
proceed with the sale by public auction under the
procedure provided under Article 2112 of the Code. IaAEHD
Respondents argue that their various consignations
made prior to the auction sale discharged them from the
loan and the pledge agreements. They are mistaken.
Petitioners point out that while the amounts
consigned by respondents could answer for their
respective principal loan obligations, they were not su
cient to cover the interests due on these loans, which were
pegged at the rate of 5% per month or 60% per annum.
Before this Court, respondents, save for Dolores
Soberano, do not contest this interest rate as alleged by
petitioners. Soberano, on the other hand, challenges this
interest rate as "usurious." 17
The particular pledge contracts did not form part of
the records elevated to this Court. However, the 5%
monthly interest rate was noted in the statement of facts
in the 14 October 1988 RTC Decision which had since
become nal. Moreover, the said decision pronounced that
even assuming that the interest rates of the various loans
were 5% per month, "it is doubtful whether the interests
so charged were exorbitantly or excessively usurious.
This is because for sometime now, usury has become
'legally inexistent.'" 18 The finality of this 1988 Decision is
a settled fact, and thus the time to challenge the validity of
the 5% monthly interest rate had long passed. With that in
mind, there is no reason for the Court to disagree with
petitioners that in order that the consignation could have
the effect of extinguishing the pledge contracts, such
amounts should cover not just the principal loans, but also
the 5% monthly interests thereon.
It bears noting that the Court of Appeals also ruled
that respondents had satis ed the requirements under
Section 18, Rule 39, which provides that the judgment
obligor may prevent the sale by paying the amount
required by the execution and the costs that have been
incurred therein. 19 However, the provision applies only to
accrued after several years, respondents were even
placed in a favorable position by the pledge agreements,
since the creditor would be unable to recover any de
ciency from the debtors should the sale price be insu cient
to cover the principal amounts with interests. Certainly,
had respondents participated in the auction, there would
have been a chance for them to recover the shares at a
price lower than the amount that was actually due from
them to the Parays. That respondents failed to avail of this
bene cial resort wholly accorded them by law is their loss.
Now, all respondents can recover is the amounts they had
consigned. TSIDaH

execution sales, and not extra-judicial sales, as evidenced

by the use of the phrases "sale of property on execution" WHEREFORE, the petition is GRANTED. The
and "judgment obligor." The reference is inapropos, and assailed decision of the Court of Appeals is SET ASIDE
even if it were applicable, the failure of the payment to
and the decision of the Cebu City RTC, Branch 16, dated
cover the interests due renders it insufficient to stay the
18 November 1992 is REINSTATED. Costs against
sale.
respondents.
The effect of the nality of the judgments in Civil
SO ORDERED.
Cases Nos. R-20120 and R-20131 should also not be
discounted. Petitioners' right to proceed with the auction Quisumbing, Carpio and Carpio-Morales, JJ.,
sale was concur.
F. rmed not only by law, but also by a nal court judgment.
Any subsequent court ruling that would enjoin the
petitioners from exercising such right would have the
effect of superseding a final and executory judgment.
Finally, we cannot help but observe that
respondents may have saved themselves much trouble if
they simply participated in the auction sale, as they are
permitted to bid themselves on their pledged properties.
20 Moreover, they would have had a better right had they
matched the terms of the highest bidder. 21 Under the
circumstances, with the high interest payments that

SECOND DIVISION
[G.R. No. 98334. May 8, 1992.]
MANUEL D. MEDIDA, Deputy Sheriff
of the Province of Cebu, CITY
SAVINGS BANK (formerly Cebu City
Savings and Loan Association, Inc.)
and TEOTIMO ABELLANA, petitioners,
vs. COURT OF APPEALS and SPS.
ANDRES DOLINO and PASCUALA
DOLINO, respondents.
Gines N. Abellana for petitioner.
Dionisio U. Flores for private respondent.
SYLLABUS
1. REMEDIAL LAW; CIVIL PROCEDURE;
EXECUTION OF JUDGMENT; REDEMPTIONER;
DEFINED. — A redemptioner is defined as a creditor
having a lien by attachment, judgment or mortgage on
the property sold, or on some part thereof, subsequent
to the judgment under which the property was sold. Of
course, while in extrajudicial foreclosure the sale
contemplated is not under a judgment but the
proceeding pursuant to which the mortgaged property
was sold, a subsequent mortgage could nevertheless
be legally constituted thereafter with the subsequent
mortgagee becoming and acquiring the rights of a
redemptioner, aside from his right against the
mortgagor.
2. ID.; ID.; APPEAL; EFFECT ON PARTY NOT
APPEALING FROM THE DECISION OF THE LOWER
COURT. — An appellee who has not himself appealed
cannot obtain from the appellate court any affirmative
relief other than the ones granted in the decision of the
court below. He cannot impugn the correctness of a
judgment not appealed from by him. He cannot assign
such errors as are designed to have the judgment
modified. All that said appellee can do is to make a
counter-assignment of errors or to argue on issues
raised at the trial only for the purpose of sustaining the
judgment in his favor, even on grounds not included in
the decision of the court a quo nor raised in the
appellant's assignment of errors or arguments.
CIVIL LAW; SPECIAL CONTRACTS; MORTGAGE;
RIGHT OF ABSOLUTE OWNERSHIP OVER THE
MORTGAGED PROPERTY BY MORTGAGOR;
REMAINS DURING THE PERIOD OF REDEMPTION. —
Since the mortgagor remains as the absolute owner of
the property during the redemption period and has the
free disposal of his property, there would be compliance
with the requisites of Article 2085 of the Civil Code for the
constitution of another mortgage on the property. To hold
otherwise would create the inequitable situation wherein
the mortgagor would be deprived of the opportunity,
which may be his last recourse, to raise funds wherewith
to timely redeem his property through another mortgage
thereon. Coming back to the present controversy, it is
undisputed that the real estate mortgage in favor of
petitioner bank was executed by respondent spouses
during the period of redemption. We reiterate that during
said period it cannot be said that the mortgagor is no
longer the owner of the foreclosed property since the rule
up to now is that the right of a purchaser at a foreclosure
sale is merely inchoate until after the period of
redemption has expired without the right being exercised.
The title to land sold under mortgage foreclosure remains
in the mortgagor or his grantee until the expiration of the
redemption period and conveyance by the master's deed.
To repeat, the rule has always been that it is only upon
the expiration of the redemption period, without the
judgment debtor having made use of his right of
redemption, that the ownership of the land sold
becomes consolidated in the purchaser.
Parenthetically, therefore, what actually is effected
where redemption is seasonably exercised by the
judgment or mortgage debtor is not the recovery of
ownership of his land, which ownership he never lost,
but the elimination from his title thereto of the lien
created by the levy on attachment or judgment or the
registration of a mortgage thereon. The American rule
is similarly to the effect that the redemption of property
sold under a foreclosure sale defeats the inchoate right
of the purchaser and restores the property to the same
condition as if no sale had been attempted. Further, it
does not give to the mortgagor a new title, but merely
restores to him the title freed of the encumbrance of the
lien foreclosed.
DECISION
REGALADO, J : p
The core issue in this case is whether or not a
mortgagor, whose property has been extrajudicially
foreclosed and sold at the corresponding foreclosure
sale, may validly execute a mortgage contract over
the same property in favor of a third party during the
period of redemption.
The present appeal by certiorari assails the decision 1 of
respondent Court of Appeals in CA-G.R. CV No. 12678
where it answered the question posed by the foregoing
issue in the negative and modified the decision 2 of the
then Court of First Instance of Cebu in Civil Case No. R-
18616 wherein the validity of said subsequent mortgage
was assumed and the case was otherwise disposed of
on other grounds.
The facts which gave rise to the institution of the
aforesaid civil case in the trial court, as found by
respondent Court of Appeals, are as follows:
"On October 10, 1974 plaintiff spouses,
alarmed of losing their right of redemption
over lot 4731 of the Cebu City Cadastre
and embraced under TCT No. 14272 from
Mr. Juan Gandioncho, purchaser of the
aforesaid lot at the foreclosure sale of the
previous mortgage in favor of Cebu City
Development Bank, went to Teotimo
Abellana, president of defendant
Association, to obtain a loan of
P30,000.00. Prior thereto or on October 3,
1974, their son Teofredo Dolino filed a
similar loan application for Twenty-Five
Thousand (P25,000.00) Pesos with lot No.
4731 offered as security for the Thirty
Thousand (P30,000.00) Pesos loan from
defendant association. Subsequently, they
executed a promissory note in favor of
 defendant association. Both documents
indicated that the principal obligation is for
Thirty Thousand (P30,000.00) Pesos
payable in one year with interest at twelve
(12%) percent per annum.
"When the loan became due and
demandable without plaintiff paying the
same, defendant association caused the
extrajudicial foreclosure of the mortgage on
March 16, 1976. After the posting and
publication requirements were complied
with, the land was sold at public auction on
April 19, 1976 to defendant association
being the highest bidder. The certificate of
sale was issued on April 20, 1976 and
registered on May 10, 1976 with the
Register of Deeds of Cebu.
"On May 24, 1971 (sic, 1977), no
redemption having been effected by
plaintiff, TCT No. 14272 was cancelled
and in lieu thereof TCT No. 68041 was
issued in the name of defendant
association." 3
xxx xxx xxx
On October 18, 1979, private respondents filed the
aforestated Civil Case No. R-18616 in the court a quo for
the annulment of the sale at public auction conducted on
April 19, 1976, as well as the corresponding certificate of
sale issued pursuant thereto.
In their complaint, private respondents, as plaintiffs
therein, assailed the validity of the extrajudicial
foreclosure sale of their property, claiming that the same
was held in violation of Act No. 3135, as amended, and
prayed, inter alia, for the cancellation of Transfer
Certificate of Title No. 68041 issued in favor of therein
defendant City Savings and Loan Association, Inc., now
known as City Savings Bank and one of the petitioners
herein.
In its answer, the defendant association therein
denied the material allegations of the complaint and
averred, among others, that the present private
respondent spouses may still avail of their right of
redemption over the land in question.
On January 12, 1983, after trial on the merits, the
court below rendered judgment upholding the
validity of the loan and the real estate mortgage,
but annulling the extrajudicial foreclosure sale
inasmuch as the same failed to comply with the
notice requirements in Act No. 3135, as
amended, under the following dispositive part:
"WHEREFORE, the foregoing premises considered
and upon the view taken by the
Court of this case, judgment is hereby rendered, as
follows:
3. Declaring ineffective the extrajudicial
foreclosure of the mortgage over Lot No.
4731 of the Cadastral Survey of Cebu;
4. Ordering the cancellation of Transfer
Certificate of Title No. 63041 of the Registry
of Deeds of the City of Cebu in the name of
defendant Cebu City Savings and Loan
Association, Inc. and the corresponding
issuance of a new transfer certificate to
contain all the annotations made in TCT
 No. 14272 of the plaintiffs Pascuala
Sabellano, married to Andres Dolino;
5. Ordering the plaintiffs aforenamed to
pay the defendant Cebu City Savings and
Loan Association, Inc. the unpaid balance
of the loan, plus interest; and reimbursing
said defendant the value of any necessary
and useful expenditures on the property
after deducting any income derived by said
defendant from the property.
For this purpose, defendant Association is
given 15 days from receipt hereof within
which to submit its statement of the
amount due it from the plaintiffs Dolino,
with notice to them. The payment to be
made by the plaintiffs shall be within
ninety (90) days from their receipt of the
order approving the amount due the
defendant Cebu City Savings and Loan
Association, Inc.
No award of damages or costs to either party.
SO ORDERED." 4
Not satisfied therewith, herein private respondents
interposed a partial appeal to respondent court with
respect to the second and third paragraphs of the
aforequoted decretal portion, contending that the lower
court erred in (1) declaring that the mortgage executed
by the therein plaintiff spouses Dolino is valid; (2)
permitting therein Cebu City Savings and Loan
Association, Inc. to collect interest after the same
foreclosure proceedings and auction sale which are
null and void from the beginning; (3) not ordering the
forfeiture of the capital or balance of the loan with
usurious interest; and (4) not sentencing therein
defendant to pay damages and attorney's fees to
plaintiffs. 5
On September 28, 1990, respondent Court of Appeals
promulgated its decision modifying the decision of the
lower court, with this adjudication:
"WHEREFORE, PREMISES
CONSIDERED, the decision appealed from
is hereby MODIFIED declaring as void and
ineffective the real estate mortgage
executed by plaintiffs in favor of defendant
association. With this modification, the
decision is AFFIRMED in other respects." 6
Herein petitioners then filed a motion for reconsideration
which was denied by respondent court in its resolution
dated March 5, 1991, hence the present petition which,
in synthesis, postulates that respondent court erred in
declaring the real estate mortgage void, and also
impugns the judgment of the trial court declaring
ineffective the extrajudicial foreclosure of said mortgage
and ordering the cancellation of Transfer Certificate of
Title No. 68041 issued in favor of the predecessor of
petitioner bank. 7
The first submission assailing the judgment
of respondent Court of Appeals is
meritorious. llcd
Said respondent court declared the real estate
mortgage in question null and void for the reason that
the mortgagor spouses, at the time when the said
mortgage was executed, were no longer the owners of
the lot, having supposedly lost the same when the lot
was sold to a purchaser in the foreclosure sale under
the prior mortgage. This holding cannot be sustained.
Preliminarily, the issue of ownership of the mortgaged
property was never alleged in the complaint nor was
the same raised during the trial, hence that issue
should not have been taken cognizance of by the Court
of Appeals. An issue which was neither averred in the
complaint nor ventilated during the trial in the court
below cannot be raised for the first time on appeal as it
would be offensive to the basic rule of fair play, justice
and due process. 8
Nonetheless, since respondent Court took cognizance
thereof and, in fact, anchored its modificatory judgment
on its ratiocination of that issue, we are inclined to
liberalize the rule so that we can in turn pass upon the
correctness of its conclusion. We may consider such
procedure as analogous to the rule that an unassigned
error closely related to an error properly assigned, or
upon which the determination of the question properly
assigned is dependent, may be considered by an
appellate court. 9 We adopt this approach since, after
all, both lower courts agreed upon the invalidity of the
extrajudicial foreclosure but differed only on the matter
of the validity of the real estate mortgage upon which
the extrajudicial foreclosure was based.
In arriving at its conclusion, respondent court placed full
reliance on what obviously is an obiter dictum laid down
in the course of the disquisition in Dizon vs. Gaborro, et
al. which we shall analyze. 10 For, as explicitly stated
therein by the Court, "(t)he basic issue to be resolved in
this case is whether the 'Deed of Sale with Assumption
of Mortgage' and the `Option to purchase Real Estate,'
two instruments executed by and between petitioner
Jose P. Dizon and Alfredo G. Gaborro (defendant
below) on the same day, October 6, 1959, constitute in
truth and in fact an absolute sale of the three parcels of
land therein described or merely an equitable mortgage
or conveyance thereof by way of security for
reimbursement or repayment by petitioner Jose P.
Dizon of any and all sums which may have been paid to
the Development Bank of the Philippines and the
Philippine National Bank by Alfredo G. Gaborro . . ."
Said documents were executed by the parties and the
payments were made by Gaborro for the debt of Dizon
to said banks after the Development Bank of the
Philippines had foreclosed the mortgage executed by
Dizon and during the period of redemption after the
foreclosure sale of the mortgaged property to said
creditor bank.llcd
The trial court held that the true agreement between the
parties therein was that Gaborro would assume and pay
the indebtedness of Dizon to the banks and, in
consideration thereof, Gaborro was given the
possession and enjoyment of the properties in question
until Dizon shall have reimbursed him for the amount
paid to the creditor banks. Accordingly, the trial court
ordered the reformation of the documents to the extent
indicated and such particular relief was affirmed by the
Court of Appeals. This Court held that the agreement
between the parties is one of those innominate
contracts under Article 1307 of the Civil Code whereby
the parties agreed "to give and to do" certain rights and
obligations, but partaking of the nature of antichresis.
Hence, on appeal to this Court, the judgment of the
Court of Appeals in that case was affirmed but with
the following pronouncements:
"The two instruments sought to be reformed
in this case appear to stipulate rights and
obligations between the parties thereto
pertaining to and involving parcels of land
that had already been foreclosed and sold
extrajudicially, and purchased by the
mortgage creditor, a third party. It becomes,
therefore, necessary, to determine the
legality of said rights and obligations arising
from the foreclosure and sale proceedings
not only between the two contracting parties
to the instruments executed between them
but also in so far as the agreement affects
the rights of the third party, the purchaser
Bank.
xxx xxx xxx
"Under the Revised Rules of Court, Rule
39, Section 33, the judgment debtor
remains in possession of the property
foreclosed and sold, during the period of
redemption. If the judgment debtor is in
possession of the property sold, he is
entitled to retain it, and receive the fruits,
the purchaser not being entitled to such
possession. (Riosa vs. Verzosa, 26 Phil.
86; Velasco vs. Rosenberg's, Inc., 32 Phil.
72; Pabico vs. Pauco, 43 Phil. 572; Power
vs. PNB, 54 Phil. 54; Gorospe vs.
Gochangco, L-12735, Oct. 30, 1959).
xxx xxx xxx
"Upon foreclosure and sale, the purchaser is entitled to
a certificate of sale executed by the sheriff. (Section 27,
Revised Rules of Court) . After the termination of the
period of redemption and no redemption having been
made, the purchaser is entitled to a deed of conveyance
and to the possession of the properties. (Section 35,
Revised Rules of Court) . The weight of authority is to
the effect that the purchaser of land sold at public
auction under a writ of execution has only an inchoate
right to the property, subject to be defeated and
terminated within the period of 12 months from the date
of sale, by a redemption on the part of the owner.
Therefore, the judgment debtor in possession of the
property is entitled to remain therein during the period
for redemption. (Riosa vs. Verzosa, 26 Phil. 86, 89;
Gonzales vs. Calimbas, 51 Phil. 355).
"In the case before Us, after the
extrajudicial foreclosure and sale of his
properties, petitioner Dizon retained the
right to redeem the lands, the possession,
use and enjoyment of the same during the
period of redemption. And these are the
only rights that Dizon could legally transfer,
cede and convey unto respondent Gaborro
under the instrument captioned Deed of
Sale with Assumption of Mortgage (Exh. A-
Stipulation), likewise the same rights that
said respondent could acquire in
consideration of the latter's promise to pay
and assume the loan of petitioner Dizon
with DBP and PNB.
"Such an instrument cannot be legally
considered a real and unconditional sale of
the parcels of land, firstly, because there was
absolutely no money consideration therefor,
as admittedly stipulated, the sum of
 P131,831.91 mentioned in the document as
the consideration `receipt of which was
acknowledged' was not actually paid; and,
secondly, because the properties had already
been previously sold by the sheriff at the
foreclosure sale, thereby divesting the
petitioner of his full right as owner thereof to
dispose and sell the lands." (Emphasis ours.)
It was apparently the second reason stated by the
Court in said case which was relied upon by
respondent court in the present case on which to
premise its conclusion. Yet, as demonstrated by the
relevant excerpts above quoted, not only was that
obiter therein unnecessary since evidently no sale was
concluded, but even inaccurate, if not inconsistent,
when considered in the context of the discussion in its
entirety. If, as admitted, the purchaser at the
foreclosure sale merely acquired an inchoate right to
the property which could ripen into ownership only
upon the lapse of the redemption period without his
credit having been discharged, it is illogical to hold that
during that same period of twelve months the
mortgagor was "divested" of his ownership, since the
absurd result would be that the land will consequently
be without an owner although it remains registered in
the name of the mortgagor.
That is why the discussion in said case carefully and
felicitously states that what is divested from the
mortgagor is only his "full right as owner thereof to
dispose (of) and sell the lands," in effect, merely
clarifying that the mortgagor does not have the
unconditional power to absolutely sell the land since the
same is encumbered by a lien of a third person which, if
unsatisfied, could result in a consolidation of ownership
in the lienholder but only after the lapse of the period of
redemption. Even on that score, it may plausibly be
argued that what is delimited is not the mortgagor's jus
disponendi, as an attribute of ownership, but merely the
rights conferred by such act of disposal which may
correspondingly be restricted.
At any rate, even the foregoing considerations and
arguments would have no application in the case at bar
and need not here be resolved since what is presently
involved is a mortgage, not a sale, to petitioner bank.
Such mortgage does not involve a transfer, cession or
conveyance of the property but only constitutes a lien
thereon. There is no obstacle to the legal creation of
such a lien even after the auction sale of the property
but during the redemption period, since no distinction is
made between a mortgage constituted over the property
before or after the auction sale thereof.
Thus, a redemptioner is defined as a creditor having a
lien by attachment, judgment or mortgage on the
property sold, or on some part thereof, subsequent to
the judgment under which the property was sold. 11 Of
course, while in extrajudicial foreclosure the sale
contemplated is not under a judgment but the
proceeding pursuant to which the mortgaged property
was sold, a subsequent mortgage could nevertheless
be legally constituted thereafter with the subsequent
mortgagee becoming and acquiring the rights of a
redemptioner, aside from his right against the
mortgagor. prcd
In either case, what bears attention is that since the
mortgagor remains as the absolute owner of the
property during the redemption period and has the free
disposal of his property, there would be compliance
with the requisites of Article 2085 of the Civil Code for
the constitution of another mortgage on the property.
To hold otherwise would create the inequitable
situation wherein the mortgagor would be deprived of
the opportunity, which may be his last recourse, to
raise funds wherewith to timely redeem his property
through another mortgage thereon.
Coming back to the present controversy, it is undisputed
that the real estate mortgage in favor of petitioner bank
was executed by respondent spouses during the period
of redemption. We reiterate that during said period it
cannot be said that the mortgagor is no longer the
owner of the foreclosed property since the rule up to
now is that the right of a purchaser at a foreclosure sale
is merely inchoate until after the period of redemption
has expired without the right being exercised. 12 The title
to land sold under mortgage foreclosure remains in the
mortgagor or his grantee until the expiration of the
redemption period and conveyance by the master's
deed. 13 To repeat, the rule has always been that it is
only upon the expiration of the redemption period,
without the judgment debtor having made use of his
right of redemption, that the ownership of the land sold
becomes consolidated in the purchaser. 14
Parenthetically, therefore, what actually is effected where
redemption is seasonably exercised by the judgment or
mortgage debtor is not the recovery of ownership of his
land, which ownership he never lost, but the elimination
from his title thereto of the lien created by the levy on
attachment or judgment or the registration of a mortgage
thereon. The American rule is similarly to the effect that
the redemption of property sold under a foreclosure sale
defeats the inchoate right of the purchaser and restores
the property to the same condition as if no sale had been
attempted. Further, it does not give to the mortgagor a
new title, but merely restores to him the title freed of the
encumbrance of the lien foreclosed. 15
We cannot rule on the plaint of petitioners that the trial
court erred in declaring ineffective the extrajudicial
foreclosure and the sale of the property to petitioner
bank. The court below spelled out at length in its
decision the facts which it considered as violative of the
provisions of Act No. 3135, as amended, by reason of
which it nullified the extrajudicial foreclosure
proceeding and its effects. Such findings and ruling of
the trial court are already final and binding on
petitioners and can no longer be modified, petitioners
having failed to appeal therefrom. prLL
An appellee who has not himself appealed cannot obtain
from the appellate court any affirmative relief other than
the ones granted in the decision of the court below. 16 He
cannot impugn the correctness of a judgment not
appealed from by him. He cannot assign such errors as
are designed to have the judgment modified. All that said
appellee can do is to make a counter-assignment of
errors or to argue on issues raised at the trial only for the
purpose of sustaining the judgment in his favor, even on
grounds not included in the decision of the court a quo
nor raised in the appellant's assignment of errors or
arguments. 17
WHEREFORE, the decision of respondent Court of
Appeals, insofar as it modifies the judgment of the trial
court, is REVERSED and SET ASIDE. The judgment of
 said trial court in Civil Case No. R-18616, dated January THIRD DIVISION
12, 1983, is hereby REINSTATED.
SO ORDERED. [G.R. No. 170215. August 28, 2007.]

Melencio-Herrera, Paras, Padilla and Nocon, JJ ., concur. SPS. ESMERALDO and ELIZABETH
SUICO, petitioners, vs. PHILIPPINE
NATIONAL BANK and HON. COURT OF
APPEALS, respondents.

DECISION

CHICO-NAZARIO, J : p

Herein petitioners, Spouses Esmeraldo and

Elizabeth Suico, obtained a loan from the Philippine
National Bank (PNB) secured by a real estate mortgage 1
on real properties in the name of the former. The
petitioners were unable to pay their obligation prompting
the PNB to extrajudicially foreclose the mortgage over the
subject properties before the City Sheriff of Mandaue City
under EJF Case No. 92-5-15.
The petitioners thereafter led a Complaint against
the PNB before the Regional Trial Court (RTC) of
Mandaue City, Branch 55, docketed as Civil Case No.
MAN-2793 for Declaration of Nullity of Extrajudicial
Foreclosure of Mortgage. 2
The Complaint alleged that on 6 May 1992, PNB
led with the O ce of the Mandaue City Sheriff a petition for
the extrajudicial foreclosure of mortgage constituted on
the petitioners' properties (subject properties) for an
outstanding loan obligation amounting to P1,991,770.38
as of 10 March 1992. The foreclosure case before the O
ce of the Mandaue City Sheriff, which was docketed as
EJF Case No. 92-5-15, covered the following properties:
TCT NO. 13196
"A parcel of land (Lot 701, plan 11-5121 Amd-
2) situated at Mandaue City, bounded on the
NE., and SE., by lot no. 700; on the SW. by
lots nos. 688 and 702; on the NW. by lot no.
714, containing an area of 2,078 sq. m. more
or less."
TAX DECL. NO. 00553
"A parcel of land situated at Tabok, Mandaue
City, Cad. Lot No. 700-C-1; bounded on the
North by Lot No. 701 & 700-B; on the South
by Lot No. 700 -C-3; on the East by lot no.
700 -C-3 and on the West by Lot no. 688,
containing an area of 200 square meters,
more or less."HTaIAC
TAX DECL. NO. 00721
"Two (2) parcels of land situated at Tabok,
Mandaue City, Cad. lot nos. 700-C-3 and 700-
C-2; bounded on the North by Lot Nos. 700-C-
1 and 700-B; on the South by Lot No. 700-D;
on the East by Lot Nos. 695 and 694; and on
the West by Lot Nos. 688 and 700-C-1,
containing an aggregate area of 1,683 sq. m.
more or less."
IDaEHS
TAX DECL. NO. 0237
"A parcel of land situated at Tabok, Mandaue
City, Cad. Lot no. 700-B. Bounded on the NE.
by (Lot 699) 109, (Lot No. 69) 110, on the SE
(Lot 700-C) 115, on the NW. (Lot 700-A) 112
and on the SW. (Lot 701) 113; containing
an area of .1785 HA more or less." AaEcHC
TAX DECL. NO. 9267
"A parcel of land situated at Tabok, Mandaue
City, Cad. Lot no. 700-A. Bounded on the
NE. by (Lot 699) 109, on the South West by
(Lot 701) 113, on the SE. by (Lot 700-B) 111,
and on the NW. by (lot 714) 040039;
containing an area of .1785 HA more or
less." 3
Petitioners claimed that during the foreclosure sale
of the subject properties held on 30 October 1992, PNB,
as the lone bidder, offered a bid in the amount of
P8,511,000.00. By virtue of the said bid, a Certi cate of
Sale of the subject properties was issued by the Mandaue
City Sheriff in favor of PNB. PNB did not pay to the Sheriff
who conducted the auction sale the amount of its bid
which was P8,511,000.00 or give an accounting of how
said amount was applied against petitioners' outstanding
loan, which, as of 10 March 1992, amounted only to
P1,991,770.38. Since the amount of the bid grossly
exceeded the amount of petitioners' outstanding
obligation as stated in the extrajudicial foreclosure of
mortgage, it was the legal duty of the winning bidder, PNB,
to deliver to the Mandaue City Sheriff the bid price or what
was left thereof after deducting the amount of petitioners'
outstanding obligation. PNB failed to deliver the amount
of their bid to the Mandaue City Sheriff or, at the very least,
the amount of such bid in excess of petitioners'
outstanding obligation.
One year after the issuance of the Certi cate of
Sale, PNB secured a Certi cate of Final Sale from the
Mandaue City Sheriff and, as a result, PNB transferred
registration of all the subject properties to its name.
HDAaIc
Owing to the failure of PNB as the winning bidder
to deliver to the petitioners the amount of its bid or even
just the amount in excess of petitioners' obligation, the
latter averred that the extrajudicial foreclosure conducted
over the subject properties by the Mandaue City Sheriff,
as well as the Certi cate of Sale and the Certi cate of
Finality of Sale of the subject properties issued by the
Mandaue City Sheriff, in favor of PNB, were all null and
void.
Petitioners, in their Complaint in Civil Case No.
MAN-2793, prayed for: caSDCA
' Declaring the Nullity of Extra-
judicial Foreclosure of Mortgage
under EJF Case No. 92-5-15
including the certificate of sale
and the final deed of sale of the
properties affected;
' Order[ing] the cancellation of the
certificates of titles and tax
declaration already in the name of
[herein respondent] PNB and revert
the same back to herein
[petitioners'] name; CAaSED
' Ordering the [PNB] to pay
[petitioners] moral damages
amounting to more than
P1,000,000.00; Exemplary
damages of P500,000.00;
Litigation expenses of
P100,000.00 and attorney's fees
of P300,000.00. 4
PNB led a Motion to Dismiss 5 Civil Case No. MAN-2793
citing the pendency of another action between the same
parties, speci cally Civil Case No. CEB-15236 before the
RTC of Cebu City entitled, PNB v. Sps. Esmeraldo and
Elizabeth Suico where PNB was seeking the payment of
the balance of petitioners' obligation not covered by the
proceeds of the auction sale held on 30 October 1992.
PNB argued that these two cases involve the same
parties. Petitioners opposed the Motion to Dismiss led by
PNB. 6 Subsequently, the Motion to Dismiss Civil Case
No. MAN- 2793 was denied in the Order of the RTC dated
15 July 1997; 7 thus, PNB was constrained to file its
Answer. 8
PNB disputed petitioners' factual narration. PNB
asserted that petitioners had other loans which had
likewise become due. Petitioners' outstanding obligation
of P1,991,770.38 as of 10 March 1992 was exclusive of
attorney's fees, and other export related obligations which
it did not consider due and demandable as of said date.
PNB maintained that the outstanding obligation of the
petitioners under their regular and export-related loans
was already more than the bid price of P8,511,000.00,
contradicting the claim of surplus proceeds due the
petitioners. Petitioners were well aware that their total
principal outstanding obligation on the date of the auction
sale was P5,503,293.21.
TIHCcA
PNB admitted the non-delivery of the bid price to the
sheriff and the execution of the nal deed of sale, but
claimed that it had not transferred in its name all the
foreclosed properties because the petition to register in
its name Transfer Certi cates of Title (TCT)
No. 37029 and No. 13196 were still pending.
On 2 February 1999, the RTC rendered its Decision
9 in Civil Case No. MAN-2793 for the declaration of nullity
of the extrajudicial foreclosure of mortgage, the dispositive
portion of which states: CTSDAI
WHEREFORE, based on the
foregoing, judgment is rendered in favor of
[herein petitioners] Sps. Esmeraldo &
Elizabeth Suico and against [herein
respondent], Philippine National Bank
(PNB), declaring the nullity of Extrajudicial
Foreclosure of Mortgage under EJF Case
No. 92-5-15, including the certi cate of sale
and the nal deed of sale of the subject
properties; ordering the cancellation of the
certi cates of titles and tax declaration
already in the name of [respondent] PNB, if
any, and revert the same back to the
[petitioners'] name; ordering [respondent]
PNB to cause a new foreclosure proceeding,
either judicially or extra-judicially.
Furnish parties thru counsels copy of this
order. 10DSETcC
In granting the nulli cation of the extrajudicial
foreclosure of mortgage, the RTC reasoned that given that
petitioners had other loan obligations which had not yet
matured on 10 March 1992 but became due by the date
of the auction sale on 30 October 1992, it does not justify
the shortcut taken by PNB and will not excuse it from
paying to the Sheriff who conducted the auction sale the
excess bid in the foreclosure sale. To allow PNB to do so
would constitute fraud, for not only is the ling fee in the
said foreclosure inadequate but, worse, the same
constitutes a misrepresentation regarding the amount of
the indebtedness to be paid in the foreclosure sale as
posted and published in the notice of sale . 11 Such
misrepresentation is fatal because in an extrajudicial
foreclosure of mortgage, notice of sale is jurisdictional.
Any error in the notice of sale is fatal and invalidates the
notice. 12
When the PNB appealed its case to the Court of
Appeals, 13 the appellate court rendered a Decision 14
dated 12 April 2005, the fallo of which provides: ADCIca
WHEREFORE, premises considered, the
instant appeal is GRANTED. The questioned
decision of the Regional Trial Court of
Mandaue City, Branch 55 dated February 2,
1999 is hereby REVERSED and SET ASIDE.
Accordingly, the extra judicial foreclosure of
mortgage under EJF 92-5-15 including the
certi cate of sale and final deed of sale
executed appurtenant thereto are hereby
declared to be valid and binding. 15
In justifying reversal, the Court of Appeals held: DSacAE
A careful scrutiny of the evidence
extant on record would show that in a letter
dated January 12, 1994, [petitioners]
expressly admitted that their outstanding
principal obligation amounted to P5.4 Million
and in fact offered to redeem the properties
at P6.5 Million. They eventually increased
their offer at P7.5 Million as evidenced by
that letter dated February 4, 1994. And nally
on May 16, 1994, they offered to redeem the
foreclosed properties by paying the whole
amount of the obligation by installment in a
period of six years. All those offers made by
the [petitioners] not only contradicted their
very assertion that their obligation is merely
that amount appearing on the petition for
foreclosure but are also indicative of the fact
that they have admitted the validity of the
extra judicial foreclosure proceedings and in
effect have cured the impugned defect.
Thus, for the [petitioners] to insist that their
obligation is only over a million is unworthy
of belief. Oddly enough, it is evident from
their acts that they themselves likewise
believe otherwise.
Even assuming that indeed there was a
surplus and the [PNB] is retaining more than
the proceeds of the sale than it is entitled, this
fact alone will not affect the validity of the sale
but simply gives the [petitioners] a cause of
action to recover such surplus. In ne, the
failure of the [PNB] to remit the surplus, if any,
is not tantamount to a non-compliance of
statutory requisites that could constitute a
jurisdictional defect invalidating the sale. This
situation only gives rise to a cause of action on
the part of the [petitioners] to recover the
alleged surplus from the [PNB]. This ruling is in
harmony with the decisional rule that in suing
for the return of the surplus proceeds, the
mortgagor is deemed to have a rmed the
validity of the sale since nothing is due if no
valid sale has been made. 16 aIHCSA
Petitioners led a Motion for Reconsideration 17 of
the foregoing Decision, but the Court of Appeals was not
persuaded. It maintained the validity of the foreclosure
sale and, in its Amended Decision dated 28 September
2005, it merely directed PNB to pay the deficiency in the
filing fees, holding thus:
WHEREFORE, Our decision dated
April 12, 2005 is hereby AMENDED. [Herein
respondent PNB] is hereby required to pay
the de ciency in the ling fees due on the
petition for extra judicial foreclosure sale to
be based on the actual amount of mortgage
debts at the time of ling thereof. In all other
respects, Our decision subject of herein
petitioners'] motion for reconsideration is
hereby AFFIRMED. 18 cda
Un inching, petitioners elevated the case before this
Court via the present Petition for Review essentially
seeking the nulli cation of the extrajudicial foreclosure of
the mortgage constituted on the subject properties.
Petitioners forward two reasons for declaring null and void
the said extrajudicial foreclosure: (1) the alleged defect or
misrepresentation in the notice of sheriff's sale; and/or (2)
failure of PNB to pay and tender the price of its bid or the
surplus thereof to the sheriff.
Petitioners argue that since the Notice of Sheriff's
Sale stated that their obligation was only P1,991,770.38
and PNB bidded P8,511,000.00, the said Notice as well
as the consequent sale of the subject properties were null
and void.
It is true that statutory provisions governing
publication of notice of mortgage foreclosure sales must
be strictly complied with, and that even slight deviations
therefrom will invalidate the notice and render the sale at
least voidable. 19 Nonetheless, we must not also lose sight
of the fact that the purpose of the publication of the Notice
of Sheriff's Sale is to inform all interested parties of the
date, time and place of the foreclosure sale of the real
property subject thereof. Logically, this not only requires
that the correct date, time and place of the foreclosure
sale appear in the notice, but also that any and all
interested parties be able to determine that what is about
to be sold at the foreclosure sale is the real property in
which they have an interest. 20
Considering the purpose behind the Notice of Sheriff's
Sale, we disagree with the nding of the RTC that the
discrepancy between the amount of petitioners'
obligation as re ected in the Notice of Sale and the
amount actually due and collected from the petitioners at
the time of the auction sale constitute fraud which
renders the extrajudicial
foreclosure sale null and void. DTEAHI
Notices are given for the purpose of securing
bidders and to prevent a sacri ce of the property. If these
objects are attained, immaterial errors and mistakes will
not affect the su ciency of the notice; but if mistakes or
omissions occur in the notices of sale, which are
calculated to deter or mislead bidders, to depreciate the
value of the property, or to prevent it from bringing a fair
price, such mistakes or omissions will be fatal to the
validity of the notice, and also to the sale made pursuant
thereto. 21
All these considered, we are of the view that the
Notice of Sale in this case is valid. Petitioners failed to
convince this Court that the difference between the
amount stated in the Notice of Sale and the amount of
PNB's bid resulted in discouraging or misleading bidders,
depreciated the value of the property or prevented it from
commanding a fair price.
DaScCH
The cases cited by the RTC in its Decision do not
apply herein. San Jose v. Court of Appeals 22 refers to a
Notice of Sheriff's Sale which did not state the correct
number of the transfer certi cates of title of the property to
be sold. This Court considered the oversight as a
substantial and fatal error which resulted in invalidating
the entire notice. The case of Community Savings and
Loan Association, Inc. v. Court of Appeals 23 is also
inapplicable, because the said case refers to an
extrajudicial foreclosure tainted with fraud committed by
therein petitioners, which denied therein respondents the
right to redeem the property. It actually has no reference
to a Notice of Sale.
We now proceed to the effect of the non-delivery by
PNB of the bid price or the surplus to the petitioners. ISTECA
The following antecedents are not disputed:
For failure to pay their loan obligation secured by a real
estate mortgage on the subject properties, PNB
foreclosed the said mortgage. In its petition for foreclosure
sale under ACT No. 3135 led before the Mandaue City
Sheriff, PNB stated therein that petitioners' total
outstanding obligation amounted to P1,991,770.38. 24
PNB bidded the amount of P8,511,000.00. Admittedly,
PNB did not pay its bid in cash or deliver the excess either
to the City Sheriff who conducted the bid or to the
petitioners after deducting the difference between the
amount of its bid and the amount of petitioners' obligation
in the Notice of Sale. The petitioners then sought to
declare the nullity of the foreclosure, alleging that their
loan obligation amounted only to P1,991,770.38 in the
Notice of Sale, and that PNB did not pay its bid in cash or
deliver to petitioner the surplus, which is required under
the law. 25DTaSIc
On the other hand, PNB claims that petitioners' loan
obligation re ected in the Notice of Sale dated 10 March
1992 did not include their other obligations, which became
due at the date of the auction sale on 10 October 1992;
as well as interests, penalties, other charges, and
attorney's fees due on the said obligation. 26
Pertinent provisions under Rule 39 of the Rules of
Court on extrajudicial foreclosure sale provide: DHTECc
SEC. 21. Judgment obligee as
purchaser. — When the purchaser is the
judgment obligee, and no third-party claim
has been led, he need not pay the amount
of the bid if it does not exceed the amount
of his judgment. If it does, he shall pay
only the excess. (Emphasis supplied.)
SEC. 39. Obligor may pay execution
against obligee. — After a writ of execution
against property has been issued, a person
indebted to the judgment obligor may pay to
the sheriff holding the writ of execution the
amount of his debt or so much thereof as
may be necessary to satisfy the judgment, in
the manner prescribed in section 9 of this
Rule, and the sheriff's receipt shall be a su
cient discharge for the amount so paid or
directed to be credited by the judgment
obligee on the execution. EICScD
Conspicuously emphasized under Section 21 of
Rule 39 is that if the amount of the loan is equal to the
amount of the bid, there is no need to pay the amount in
cash. Same provision mandates that in the absence of a
third-party claim, the purchaser in an execution sale need
not pay his bid if it does not exceed the amount of the
judgment; otherwise, he shall pay only the excess. 27
The raison de etre is that it would obviously be
senseless for the Sheriff or the Notary Public conducting
the foreclosure sale to go through the idle ceremony of
receiving the money and paying it back to the creditor,
under the truism that the lawmaking body did not
contemplate such a pointless application of the law in
requiring that the creditor must bid under the same
conditions as any other bidder. It bears stressing that the
rule holds true only where the amount of the bid
represents the total amount of the mortgage debt.
28 CDAHIT
The question that needs to be addressed in this
case is: considering the amount of PNB's bid of
P8,511,000.00 as against the amount of the petitioners'
obligation of P1,991,770.38 in the Notice of Sale, is the
PNB obliged to deliver the excess? ACETSa
Petitioners insist that the PNB should deliver the
excess. On the other hand PNB counters that on the date
of the auction sale on 30 October 1992, petitioners' other
loan obligation already exceeded the amount of
P1,991,770.38 in the Notice of Sale.
 Rule 68, Section 4 of the Rules of Court provides:
SEC. 4. Disposition of proceeds of sale. — The
CDHacE
amount realized from the foreclosure sale of the
mortgaged property shall, after deducting the costs of
the sale, be paid to the person foreclosing the
mortgage, and when there shall be any balance or
residue, after paying off the mortgage debt due, the
same shall be paid to junior encumbrancers in the
order of their priority, to be ascertained by the court,
or if there be no such encumbrancers or there be a
balance or residue after payment to them, then to the
mortgagor or his duly authorized agent, or to the
person entitled to it.
Under the above rule, the disposition of the
proceeds of the sale in foreclosure shall be as follows:
" first, pay the costs
" secondly, pay off the mortgage debt SCDaET
" thirdly, pay the junior encumbrancers, if
any in the order of priority
" fourthly, give the balance to the
mortgagor, his agent or the
person entitled to it. 29
EHScCA
Based on the foregoing, after payment of the costs
of suit and satisfaction of the claim of the rst
mortgagee/senior mortgagee, the claim of the second
mortgagee/junior mortgagee may be satis ed from the
surplus proceeds. The application of the proceeds from
the sale of the mortgaged property to the mortgagor's
obligation is an act of payment, not payment by dacion;
hence, it is the mortgagee's duty to return any surplus in
the selling price to the mortgagor. Perforce, a mortgagee
who exercises the power of sale contained in a mortgage
is considered a custodian of the fund and, being bound to
apply it properly, is liable to the persons entitled thereto if
he fails to do so. And even though the mortgagee is not
strictly considered a trustee in a purely equitable sense,
but as far as concerns the unconsumed balance, the
mortgagee is deemed a trustee for the mortgagor or
owner of the equity of redemption. 30
Thus it has been held that if the mortgagee is
retaining more of the proceeds of the sale than he is
entitled to, this fact alone will not affect the validity of the
sale but simply give the mortgagor a cause of action to
recover such surplus. 31 ECDaAc
TICAcD
In the case before us, PNB claims that petitioners'
loan obligations on the date of the auction sale were
already more than the amount of P1,991,770.38 in the
Notice of Sale. In fact, PNB claims that on the date of the
auction sale, petitioners' principal obligation, plus
penalties, interests, attorneys fees and other charges
were already beyond the amount of its bid of
P8,511,000.00.
After a careful review of the evidence on record, we
nd that the same is insu cient to support PNB's claim.
Instead, what is available on record is petitioner's
Statement of Account as prepared by PNB and attached
as Annex A 32 to its Answer with counterclaim.
. In this Statement of Account, petitioners' principal
obligation with interest/penalty and attorney's fees as of
30 October 1992 already amounted to P6,409,814.92. cdphil
Although petitioners denied the amounts reflected
in the Statement of Account from PNB, they did not
interpose any defense to refute the computations therein.
Petitioners' mere denials, far from being compelling, had
nothing to offer by way of evidence. This then enfeebles
the foundation of petitioners' protestation and will not su
ce to overcome the computation of their loan obligations
as presented in the Statement of Account submitted by
PNB. 34
Noticeably, this Statement of Account is the only
piece of evidence available before us from which we can
determine the outstanding obligations of petitioners to
PNB as of the date of the auction sale on 10 October
1992. CaHAcT
It did not escape the attention of this Court that petitioners
wrote a number of letters to PNB almost two years after
the auction sale, 35 in which they offered to redeem the
property. In their last letter, petitioners offered to redeem
their foreclosed properties for P9,500,000.00. However,
these letters by themselves cannot be used as bases to
support PNB's claim that petitioners' obligation is more
than its bid of P8,500,000.00, without any other evidence.
There was no computation presented to show how
petitioners' obligation already reached P9,500,000.00.
Petitioners could very well have offered such an amount
on the basis of the value of the foreclosed properties
rather than their total obligation to PNB. We cannot take
petitioners' offer to redeem their properties in the amount
of P9,500,000.00 on its face as an admission of the
amount of their obligation to PNB without any supporting
evidence.
Given that the Statement of Account from PNB,
being the only existing documentary evidence to support
its claim, shows that petitioners' loan obligations to PNB
as of 30 October 1992 amounted to P6,409,814.92, and
considering that the amount of PNB's bid is
P8,511,000.00, there is clearly an excess in the bid price
which PNB must return, together with the interest
computed in accordance with the guidelines laid down by
the court in Eastern Shipping Lines v. Court of Appeals, 36
regarding the manner of computing legal interest, viz: HIaTDS
4. With regard particularly to an
award of interest in the concept of actual and
compensatory damages, the rate of interest,
as well as the accrual thereof, is imposed, as
follows:
1. When the obligation is
breached, and it consists in the payment of a
sum of money, i.e., a loan or forbearance of
money, the interest due should be that which
may have been stipulated in writing.
Furthermore, the interest due shall itself earn
legal interest from the time it is judicially
demanded. In the absence of stipulation, the
rate of interest shall be 12% per annum to be
computed from default, i.e., from judicial or
extrajudicial demand under and subject to
the provisions of Article 1169 of the Civil
Code. cDIHES
2. When an obligation, not
constituting a loan or forbearance of money,
is breached, an interest on the amount of
damages awarded may be imposed at the
discretion of the court at the rate of 6% per
annum. No interest, however, shall be
adjudged on unliquidated claims or damages
except when or until the demand can be
established with reasonable certainty.
 Accordingly, where the demand is
established with reasonable certainty, the
interest shall begin to run from the time the
claim is made judicially or extrajudicially (Art.
1169, Civil Code) but when such certainty
cannot be so reasonably established at the
time the demand is made, the interest shall
begin to run only from the date the judgment
of the court is made (at which time the quanti
cation of damages may be deemed to have
been reasonably ascertained). The actual
base for the computation of legal interest
shall, in any case, be on the amount nally
adjudged.
3. When the judgment of the court
awarding a sum of money becomes nal and
executory, the rate of legal interest, whether
the case falls under
paragraph 1 or paragraph 2, above, shall be
12% per annum from such nality until its
satisfaction, this interim period being
deemed to be by then an equivalent to a
forbearance of credit.
IEHaSc
In Philippine National Bank v. Court of Appeals, 37 it
was held that:
The rate of 12% interest referred to in Cir.
416 applies only to: CAcEaS
Loan or forbearance of money, or to cases
where money is transferred from one person
to another and the obligation to return the
same or a portion thereof is adjudged. Any
other monetary judgment which does not
involve or which has nothing to do with loans
or forbearance of any, money, goods or credit
does not fall within its coverage for such
imposition is not within the ambit of the
authority granted to the Central Bank. When an
obligation not constituting a loan or
forbearance of money is breached then an
interest on the amount of damages awarded
may be imposed at the discretion of the court
at the rate of 6% per annum in accordance with
Art. 2209 of the Civil Code. Indeed, the
monetary judgment in favor of private
respondent does not involve a loan or
forbearance of money, hence the proper
imposable rate of interest is six (6%) per cent.
Using the above rule as yardstick, since the
responsibility of PNB arises not from a loan or forbearance
of money which bears an interest rate of 12%, the proper
rate of interest for the amount which PNB must return to
the petitioners is only 6%. This interest according to
Eastern Shipping shall be computed from the time of the
ling of the complaint. However, once the judgment
becomes nal and executory, the "interim period from the
nality of judgment awarding a monetary claim and until
payment thereof, is deemed to be equivalent to a
forbearance of credit." Thus, in accordance with the
pronouncement in Eastern Shipping, the rate of 12% per
annum should be imposed, to be computed from the time
the judgment becomes final and executory until fully
satisfied.
CIaHDc
It must be emphasized, however, that our holding
in this case does not preclude PNB from proving and
recovering in a proper proceeding any de ciency in the
amount of petitioners' loan obligation that may have
accrued after the date of the auction sale.
 WHEREFORE, premises considered, the Decision THIRD DIVISION
of the Court of Appeals dated 12 April 2005 is MODIFIED
in that the PNB is directed to return to the petitioners the [G.R. No. 128567. September 1, 2000.]
amount of P2,101,185.08 with interest computed at 6%
per annum from the time of the filing of the complaint until HUERTA ALBA RESORT INC. ,
its full payment before nality of judgment. Thereafter, if the petitioner, vs. COURT OF APPEALS and
amount adjudged remains unpaid, the interest rate shall SYNDICATED MANAGEMENT GROUP
be 12% per annum computed from the time the judgment INC., respondents.
became nal and executory until fully satis ed. Costs
against private respondent. cDCSET

Benjamin C. Santos & Ofelia Calcetas-Santos and

SO ORDERED. Santos Parungao Aquino & Santos for petitioner.
Ynares-Santiago, Austria-Martinez, Nachura and Reyes, Oben, Ventura Defensor.
JJ., concur.
Abola Associates for petitioner.
Atienza Tabora Del Rosario & Castillo Law Office
for respondents.

SYNOPSIS

Private respondent Syndicated Management

Group, Inc. (SMGI), as mortgagee-assignee of Intercom
Fund Resource, Inc., led a complaint for judicial
foreclosure of four parcels of land mortgaged by petitioner
Huerta Alba Resort, Inc. before the Regional Trial Court
of Makati City. The trial court ruled in favor of private
respondent and ordered the petitioner to pay all its
obligations within a period of not less than 150 days from
receipt of the decision. The appeals to the Court of
Appeals as well as the Petition for Certiorari to the
Supreme Court led by petitioner were all dismissed. The
dismissal became nal and executory and it was entered in
the Book of Entries of Judgment on March 14, 1994.
Accordingly, a writ of execution was issued and the
auction sale of the subject properties was set on
September 6, 1994. The petitioner then questioned the
issuance of the said Writ of Execution by claiming that the
150-day period for petitioner to pay the judgment
obligation had not yet lapsed. This issue was again raised
by petitioner to the Court of Appeals. The Court of Appeals
ruled that the 150-day period should be computed from
the date the petitioner was noti ed of the Entry of
Judgment and it expired on September 11, 1994.
Subsequently, the trial court con rmed the sale of subject
properties to the private respondent. When the private
respondent led a motion for a Writ of Possession, again it
was opposed by petitioner by ling a motion to compel
private respondent to accept redemption. This is the rst
time petitioner asserted its right to redeem the subject
properties under Section 78 of R.A. No. 337 (General
Banking Act). The trial court allowed the petitioner to
redeem the subject properties. However, in a Petition for
Certiorari, Prohibition and Mandamus led by private
respondents, the Court of Appeals set aside the said
Order of the trial court. Hence, this petition.
THCSAE
The Court ruled that the claim that petitioner is entitled to
the bene cial provisions of Section 78 of R.A. No. 337 —
since private respondent's predecessor-in-interest is a
credit institution — is in the nature of a compulsory
counterclaim which should have been averred in
petitioner's answer to the complaint for judicial
foreclosure. The failure of petitioner to seasonably assert
its alleged right under Section 78 of R.A. No. 337
precludes it from so doing at this late stage of the case.
Estoppel may be successfully invoked if the party fails to
raise the question in the early stages of the proceedings.
Hence, in conformity with the ruling in Limpin vs. IAC (166
SCRA 87), the sale of the subject properties, operated to
divest the rights of all the parties to the action and to vest
their rights in private respondent. There then existed only
what is known as the equity of redemption, which is simply
the right of the petitioner to extinguish the mortgage and
retain ownership of the property by paying the secured
debt within the 90-day period after judgment became nal.
There being an explicit nding by the Court of Appeals in
its decision that the herein petitioner failed to exercise its
equity of redemption within the prescribed period,
redemption can no longer be effected. The con rmation of
the sale and the issuance of the transfer certi cates of title
covering the subject properties to private respondent was
in order. The trial court, therefore, has the ministerial duty
to place private respondent in the possession of subject
properties.
SYLLABUS
. 1. REMEDIAL LAW; SPECIAL CIVIL
ACTIONS; FORECLOSURE OF REAL ESTATE
MORTGAGE; EQUITY OF REDEMPTION AND RIGHT OF
REDEMPTION; DISTINGUISHED. — On the distinction
between the equity of redemption and right of redemption,
the case of Gregorio Y. Limpin vs. Intermediate Appellate
Court , comes to the fore. Held the Court in the said case:
"The equity of redemption is, to be sure, different from and
should not be confused with the right of redemption. The
right of redemption in relation to a mortgage — understood
in the sense of a prerogative to re-acquire mortgaged
property after registration of the foreclosure sale — exists
only in the case of the extrajudicial foreclosure of the
mortgage. No such right is recognized in a judicial
foreclosed of the mortgage. No such right is recognized in a
judicial foreclosed except only where the mortgagee is the
Philippine National Bank or a bank or banking institution.
Where a mortgage is foreclosed extrajudicially, Act 3135
grants to the mortgagor the right of redemption within one
(1) year from the registration of the sheriff's certi cate of
foreclosure sale. Where the foreclosure is judicially effected,
however, no equivalent right of redemption exists. The law
declares that a judicial foreclosure sale, when con rmed by
an order of the court, . . . shall operate to divest the rights
of all the parties to the action and to vest their rights in the
purchaser, subject to such rights of redemption as may be
allowed by law. Such rights exceptionally 'allowed by law'
(i.e., even after con rmation by an order of the court) are
those granted by the charter of the Philippine National
Bank (Acts No. 2747 and 2938), and the General Banking
Act (R.A. 337). These laws confer on the mortgagor, his
successors in interest or any judgment creditor of the
mortgagor, the right to redeem the property sold on
foreclosure — after con rmation by the court of the
foreclosure sale — which right may be exercised within a
period of one (1) year, counted from the date of
registration of the certi cate of sale in the Registry of
Property. But, to repeat, no such right of redemption exists
in case of judicial foreclosure of a mortgage if the
mortgagee is not the PNB or a bank or banking institution.
In such a case, the foreclosure sale, 'when con rmed by
an order of the court. . . . shall operate to divest the rights
of all the parties to the action and to vest their rights in the
purchaser.' There then exists only what is known as the
equity of redemption. This is simply the right of the
defendant mortgagor to extinguish the mortgage and
retain ownership of the property by paying the secured
debt within the 90- day period after the judgment becomes
nal, in accordance with Rule 68, or even after the
foreclosure sale but prior to its confirmation.
. 2. ID.; ID.; ID.; BENEFICIAL PROVISIONS OF
SECTION 78 OF GENERAL BANKING ACT MUST BE
RAISED AS COMPULSORY COUNTERCLAIM. — [A]t the
earliest opportunity, when it submitted its answer to the
complaint for judicial foreclosure, petitioner should have
alleged that it was entitled to the bene cial provisions of
Section 78 of R.A. No. 337 but again, it did not make any
allegation in its answer regarding any right thereunder. It
bears stressing that the applicability of Section 78 of R.A.
No. 337 hinges on the factual question of whether or not
private respondent's predecessor in interest was a credit
institution. As was held in Limpin, a judicial foreclosure
sale, "when con rmed by an order of the court, . . . shall
operate to divest the rights of all the parties to the action
and to vest their rights in the purchaser, subject to such
rights of redemption as may be allowed by law ," which
confer on the mortgagor, his successors in interest of any
judgment creditor of the mortgagor, the right to redeem
the property sold on foreclosure after con rmation by the
court of the judicial foreclosure sale. Thus, the claim that
petitioner is entitled to the bene cial provisions of Section
78 of R.A. No. 337 — since private respondent's
predecessor- in-interest is a credit institution — is in the
nature of a compulsory counterclaim which should have
been averred in petitioner's answer to the complaint for
judicial foreclosure.
.
. 3. ID.; ID.; ID.; ID.; NOT ALLEGED BY
PETITIONER IN EARLY STAGES OF PROCEEDINGS.
— [I]t was too late in the day for petitioner to invoke a right
to redeem under Section 78 of R.A. No. 337. Petitioner
failed to assert a right to redeem in several
crucial stages of the proceedings. For instance, on
September 7, 1994, when it led with the trial court an Ex-
parte Motion for Clari cation, petitioner failed to allege and
prove that private respondent's predecessor in interest
was a credit institution . . . So also, when it presented
before the trial court an Exception to the Order and Motion
to Set Aside said Order dated October 13, 1994, petitioner
again was silent on its alleged right under Section 78 of
R.A. No. 337 . . . Then, too, nothing was heard from
petitioner on its alleged right under Section 78 of R.A. No.
337 and of the predecessor in interest of private
respondent as a credit institution, when the trial court
came out with an order on February 10, 1995, con rming
the sale of subject properties in favor private respondent
and declaring that all pending incidents with respect to the
Order dated September 26, 1994 had become moot and
academic. Similarly, when petitioner led on February 27,
1995 a Motion for Clari cation with the Court of Appeals,
seeking "clari cation" of the date of commencement of the
one (1) year redemption period for the subject properties
. . . If petitioner were really acting in good faith, it would
have ventilated, before the Court of Appeals in CA-G.R.
No. 35086 its alleged right under Section 78 of R.A. No.
337; but petitioner never did do so. cDAITS
4. ID.; ID.; ID.; ID.; ID.; PRINCIPLE OF
ESTOPPEL APPLIES. — The failure of petitioner to
seasonably assert its alleged right under Section 78 of
R.A. No. 337 precludes it from so doing at this late stage
of the case. Estoppel may be successfully invoked if the
party fails to raise the question in the early stages of the
proceedings. Thus, "a party to a case who failed to invoke
his claim in the main case, while having the opportunity to
do so, will be precluded, subsequently, from invoking his
claim, even if it were true, after the
decision has become nal, otherwise the judgment may
be reduced to a mockery and the administration of
justice may be placed in disrepute."
ID.; CIVIL PROCEDURE; COUNTERCLAIM;
ELUCIDATED. — ". . . A counterclaim is, most broadly, a
cause of action existing in favor of the defendant against
the plaintiff. More narrowly, it is a claim which, if
established, will defeat or in some way qualify a judgment
or relief to which plaintiff is otherwise entitled. It is
sometimes de ned as any cause of action arising in
contract available against any action also arising in
contract and existing at the time of the commencement of
such an action. It is frequently de ned by the codes as a
cause of action arising out of the contract or transaction
set forth in the complaint as the foundation of the plaintiff's
claim, or connected with the subject of the action." "The
counterclaim is in itself a distinct and independent cause
of action, so that when properly stated as such, the
defendant becomes, in respect to the matters stated by
him, an actor, and there are two simultaneous actions
pending between the same parties, wherein each is at the
same time both a plaintiff and a defendant. Counterclaim
is an offensive as well as a defensive plea and is not
necessarily con ned to the justice of the plaintiffs claim. It
represents the right of the defendant to have the claims of
the parties counterbalanced in whole or in part, and
judgment to be entered in excess, if any. A counterclaim
stands on the same footing, and is to be tested by the
same rules, as if it were an independent action."
6. ID.; ID.; ID.; PURPOSE. — ". . . The rules of
counterclaim are designed to enable the disposition of a
whole controversy of interested parties' con icting claims,
at one time and in one action, provided all parties' be
brought before the court and the matter decided without
prejudicing the rights of any party." ScHADI
7. ID.; ID.; EXECUTION OF JUDGMENT;
ERRONEOUS FOR THE TRIAL COURT TO ALLOW A
PARTY AT THIS STAGE TO INTRODUCE EVIDENCE AND
OVERRULE THE LAW OF THE CASE. — [T]he trial court
erred in still allowing petitioner to introduce evidence that
private respondent's predecessor-in-interest was a credit
institution, and to thereafter rule that the petitioner was
entitled to avail of the provisions of Section 78 of R.A. No.
337. In effect, the trial court permitted the petitioner to
accomplish what the latter failed to do before the Court of
Appeals, that is, to invoke its alleged right under Section 78
of R.A. 337 although the Court of Appeals in CA-G.R. No.
35086 already found that 'the question of whether the
Syndicated Management Council Group, Inc. is a bank or
credit institution was never brought before (the Court of
Appeals) squarely." The said pronouncement by the Court
of Appeals unerringly signi ed that petitioner did not make a
timely assertion of any right under Section 78 of R.A. No.
337 in all the stages of the proceedings below.
8. ID.; ID.; ID.; LAW OF THE CASE; REMAINS
AS IT IS, WHETHER OR NOT IT IS ERRONEOUS IS
IMMATERIAL. — There is, . . . merit in private
respondent's contention that to allow petitioner to
belatedly invoke its right under Section 78 of R.A. No. 337
will disturb the "law of the case." However, private
respondent's statement of what constitutes the "law of the
case" is not entirely accurate. The "law of the case" is not
simply that the defendant possesses an equity of
redemption. As the Court has stated, the "law of the case"
holds that petitioner has the equity of the redemption
without any quali cation whatsoever, that is, without the
right of redemption afforded by Section 78 of R.A. No.
337. Whether or not the "law of the case" is erroneous is
immaterial, it still remains the "law of the case." A contrary
rule will contradict both the letter and spirit of the rulings
of the Court of Appeals in CA-G.R. SP No. 35086, CA-
G.R. CV No. 39243, and CA-G.R. 38747, which clearly
saw through the repeated attempts of petitioner to forestall
so simple a matter as making the security given for a just
debt to answer for its payment. HATICc
ID.; SPECIAL CIVIL ACTIONS; FORECLOSURE OF REAL
ESTATE MORTGAGE; EQUITY OF REDEMPTION CAN
NO LONGER BE EFFECTED FOR FAILURE TO
EXERCISE WITHIN THE PRESCRIBED PERIOD. — [T]he
sale of the subject properties, as confirmed by the Order
dated February 10, 1995 of the trial court in Civil Case No.
89-5424 operated to divest the rights of all the parties to the
action and to vest their rights in private respondent. There
then existed only what is known as the equity of redemption,
which is simply the right of the petitioner to extinguish the
mortgage and retain ownership of the property by paying the
secured debt within the 90-day period after the judgment
became final. There being an explicit finding on the part of
the Court of Appeals in its Decision of September 30,
1994 in CA-G.R. No. 35086 — that the herein petitioner
failed to exercise its equity of redemption within the
prescribed period, redemption can no longer be effected.
The confirmation of the sale and the issuance of the
transfer certificates of title covering the subject properties
to private respondent was then, in order. The trial court
therefore, has the ministerial duty to place private
respondent in the possession of subject properties.
DECISION
PURISIMA, J. : p
Litigation must at some time be terminated, even at
the risk of occasional errors. Public policy dictates that
once a judgment becomes nal, executory and
unappealable, the prevailing party should not be denied
the fruits of his victory by some subterfuge devised by the
losing party. Unjusti ed delay in the enforcement of a
judgment sets at naught the role of courts in disposing
justiciable controversies with finality.
The Case
At bar is a petition assailing the Decision, dated
November 14, 1996, and Resolution, dated March 11,
1997, of the Court of Appeals in CA-G.R. No. 38747,
which set aside the Order, dated July 21, 1995 and Order,
dated September 4, 1997, of the Regional Trial Court of
Makati City, in Civil Case No. 89-5424. The aforesaid
orders of the trial court held that petitioner had the right to
redeem subject pieces of property within the one-year
period prescribed by Section 78 of Republic Act No. 337
otherwise known as the General Banking Act.
Section 78 of R.A. No. 337 provides that "in case of
a foreclosure of a mortgage in favor of a bank, banking or
credit institution, whether judicially or extrajudicially, the
mortgagor shall have the right, within one year after the
sale of the real estate as a result of the foreclosure of the
respective mortgage, to redeem the property."
The Facts
The facts that matter are undisputed:
In a complaint for judicial foreclosure of mortgage
with preliminary injunction led on October 19, 1989,
docketed as Civil Case No. 89 -5424 before the Regional
Trial Court of Makati City, the herein private respondent
sought the foreclosure of four (4) parcels of land
mortgaged by petitioner to Intercon Fund Resource, Inc.
("Intercon").
Private respondent instituted Civil Case No. 89-
5424 as mortgagee- assignee of a loan amounting to P8.5
million obtained by petitioner from Intercon, in whose favor
petitioner mortgaged the aforesaid parcels of land as
security for the said loan.
In its answer below, petitioner questioned the
assignment by Intercon of its mortgage right thereover to
the private respondent, on the ground that the same was
ultra vires. Petitioner also questioned during the trial the
correctness of the charges and interest on the mortgage
debt in question.
On April 30, 1992, the trial court, through the then
Judge now Court of Appeals Justice Buenaventura J.
Guerrero, came out with its decision "granting herein
private respondent SMGI's complaint for judicial
foreclosure of mortgage", disposing as follows:
"WHEREFORE, judgment is hereby rendered
aSECAD
ordering defendant to pay plaintiff the following:

1. P8,500,000.00 representing the
principal of the amount due;
2. P850,000.00 as penalty charges with
interest at 6% per annum,
until fully paid;
3. 22% per annum interest on
the above principal from September 6,
1998, until fully paid;
4. 5% of the sum total of the
above amounts, as reasonable attorney's
fees; and,
5. Costs.
All the above must be paid within a
period of not less than 150 days from receipt
hereof by the defendant. In default of such
payment, the four parcels of land subject
matter of the suit including its improvements
shall be sold to realize the mortgage debt
and costs, in the manner and under the
regulations that govern sales of real estate
under execution." 1
Petitioner appealed the decision of the trial court to
the Court of Appeals, the appeal docketed as CA-G.R. CV
No. 39243 before the Sixth Division of the appellate court,
which dismissed the case on June 29, 1993 on the ground
of late payment of docket fees.
Dissatis ed with the dismissal of CA-G.R. No.
39243, petitioner came to this Court via a petition for
certiorari, docketed as G.R. No. 112044, which this court
resolved to dismiss on December 13, 1993, on the nding
that the Court of Appeals erred not in dismissing the
appeal of petitioner.
Petitioner's motion for reconsideration of the
dismissal of its petition in G.R. No. 112044 was denied
with nality in this Court's Resolution promulgated on
February 16, 1994. On March 10, 1994, leave to present
a second motion for reconsideration in G.R. No. 112044
or to submit the case for hearing by the Court en banc was
led, but to no avail. The Court resolved to deny the same
on May 11, 1994. LibLex
On March 14, 1994, the Resolution dated
December 13, 1993, in G.R. No. 112044 became final and
executory and was entered in the Book of Entries of
Judgment.
On July 4, 1994, private respondent led with the trial
court of origin a motion for execution of the Decision
promulgated on April 30, 1992 in Civil Case No. 89-5424.
The said motion was granted on July 15, 1994.
Accordingly, on July 15, 1994 a writ of execution
issued and, on July 20, 1994, a Notice of Levy and
Execution was issued by the Sheriff concerned, who
issued on August 1, 1994 a Notice of Sheriff's Sale for the
auction of subject properties on September 6, 1994.
On August 23, 1994, petitioner led with the same trial
court an Urgent Motion to Quash and Set Aside Writ of
Execution ascribing to it grave abuse of discretion in
issuing the questioned Writ of Execution. To support its
motion, petitioner invited attention and argued that the
records of the case were still with the Court of Appeals
and therefore, issuance of the writ of execution was
premature since the 150 -day period for petitioner to pay
the judgment obligation had not yet lapsed and petitioner
had not yet defaulted in the payment thereof since no
demand for its payment was made by the private
respondent. In petitioner's own words, the dispute
between the parties was "principally on the issue as to
when the 150-day period within which Huerta Alba may
exercise its equity of redemption should be counted."
In its Order of September 2, 1994, the lower court
denied petitioner's urgent motion to quash the writ of
execution in Civil Case No. 89-5424, opining that subject
judgment had become nal and executory and
consequently, execution thereof was a matter of right and
the issuance of the corresponding writ of execution
became its ministerial duty.
Challenging the said order granting execution,
petitioner led once more with the Court of Appeals another
petition for certiorari and prohibition with preliminary
injunction, docketed as C.A.-G.R. SP No. 35086,
predicated on the same grounds invoked for its Motion to
Quash Writ of Execution.
On September 6, 1994, the scheduled auction sale
of subject pieces of properties proceeded and the private
respondent was declared the highest bidder. Thus, private
respondent was awarded subject bidded pieces of
property. The covering Certificate of Sale issued in its
favor was registered with the Registry of Deeds on
October 21, 1994.
On September 7, 1994, petitioner presented an Ex-
Parte Motion for Clarification asking the trial court to
"clarify" whether or not the twelve (12) month period of
redemption for ordinary execution applied in the case.
On September 26, 1994, the trial court ruled that
the period of redemption of subject property should be
governed by the rule on the sale of judicially foreclosed
property under Rule 68 of the Rules of Court.
Thereafter, petitioner then filed an Exception to the
Order dated September 26, 1994 and Motion to Set Aside
Said Order, contending that the said Order materially
altered the Decision dated April 30, 1992 "which declared
that the satisfaction of the judgment shall be in the manner
and under the regulation that govern sale of real estate
under execution."
Meanwhile, in its Decision of September 30, 1994,
the Court of Appeals resolved the issues raised by the
petitioner in C.A.-G.R. SP No. 35086, holding that the one
hundred- fty day period within which petitioner may
redeem subject properties should be computed from the
date petitioner was notified of the Entry of Judgment in
G.R. No. 112044; and that the 150-day period within
which petitioner may exercise its equity of redemption
expired on September 11, 1994.
Thus:
"Petitioner must have received the
resolution of the Supreme Court dated
February 16, 1994 denying with finality its
motion for reconsideration in G.R. No.
112044 before March 14, 1994 , otherwise
the Supreme Court would not have made an
entry of judgment on March 14, 1994. While,
computing the 150-day period. Petitioner
 may have until September 11, 1994. within
which to pay the amounts covered by the
judgment, such period has already expired
by this time, and therefore, this Court has no
more reason to pass upon the parties'
opposing contentions, the same having
become moot and academic." 2 The pertinent Order declared that all pending incidents
(underscoring supplied). IcaHTA
Petitioner moved for reconsideration of the Decision of the
Court of Appeals in C.A.-G.R. SP No. 35086. In its Motion
for Reconsideration dated October 18, 1994, petitioner
theorized that the period of one hundred fty (150) days
should not be reckoned with from Entry of Judgment but
from receipt on or before July 29, 1994 by the trial court of
the records of Civil Case No. 89-5424 from the Court of
Appeals. So also, petitioner maintained that it may not be
considered in default, even after the expiration of 150
days from July 29, 1994, because prior demand to pay
was never made on it by the private respondent.
According to petitioner, it was therefore, premature for the
trial court to issue a writ of execution to enforce the
judgment.
The trial court deferred action on the Motion for
Confirmation of the Certificate of Sale in view of the
pendency of petitioner's Motion for Reconsideration in
CA-G.R. SP No. 35086.
On December 23, 1994, the Court of Appeals
denied petitioner's motion for reconsideration in CA-G.R.
SP No. 35086. Absent any further action with respect to
the denial of the subject motion for reconsideration,
private respondent presented a Second Motion for
Confirmation of Certificate of Sale before the trial court.
As regards the Decision rendered on September
30, 1994 by the Court of Appeals in CA G.R. SP No.
35086 it became final and executory on January 25, 1995.
On February 10, 1995, the lower court con rmed
the sale of subject properties to the private respondent.
relating to the Order dated September 26, 1994 had
become moot and academic. Conformably, the Transfer
Certi cates of Title to subject pieces of property were then
issued to the private respondent.
On February 27, 1995, petitioner led with the Court
of Appeals a Motion for Clarifiation seeking "clarification"
of the date of commencement of the one (1) year period
for the redemption of the properties in question.
In its Resolution dated March 20, 1995, the Court
of Appeals merely noted such Motion for Clarification
since its Decision promulgated on September 30, 1994
had already become final and executory; ratiocinating
thus:
"We view the motion for clarification
led by petitioner, purportedly signed by its
proprietor, but which we believe was
prepared by a lawyer who wishes to hide
under the cloak of anonymity, as a veiled
attempt to buy time and to delay further the
disposition of this case.
Our decision of September 30, 1994
never dealt on the right and period of
redemption of petitioner, but was merely
circumscribed to the question of whether
 respondent judge could issue a writ of
execution in its Civil Case No. 89-5424 . . . .
We further ruled that the one-hundred
fifty day period within which petitioner may
exercise its equity of redemption should be
counted, not from the receipt of respondent
court of the records of Civil Case No. 89-5424
but from the date petitioner was notified of the
entry of judgment made by the appellate court.
But we never made any pronouncement on
the one-year right of redemption of
petitioner because, in the first place, the
foreclosure in this case is judicial. and as
such the mortgagor has only the equity not
the right of redemption . . . . While it may be
true that under Section 78 of R.A. 337 as
amended, otherwise known as the General
Banking Act, a mortgagor of a bank,
banking or credit institution, whether the
foreclosure was done judicially or
extrajudicially, has a period of one year
from the auction sale within which to
redeem the foreclosed property, the
question of whether the Syndicated
Management Group, Inc., is a bank or credit
institution was never brought before us
squarely, and it is indeed odd and strange
that petitioner would now sarcastically ask a
rhetorical question in its motion for clari
cation." 3 (Emphasis supplied).
Indeed, if petitioner did really act in good faith, it
would have ventilated before the Court of Appeals in CA-
G.R. No. 35086 its pretended right under Section 78 of
R.A. No. 337 but it never did so.
At the earliest opportunity, when it led its answer to
the complaint for judicial foreclosure, petitioner should
have averred in its pleading that it was entitled to the bene
cial provisions of Section 78 of R.A. No. 337; but again,
petitioner did not make any such allegation in its answer.
From the said Resolution, petitioner took no further
step such that on March 31, 1995, the private respondent
led a Motion for Issuance of Writ of Possession with the
trial court.
THCSEA
During the hearing called on April 21, 1995, the
counsel of record of petitioner entered appearance and
asked for time to interpose opposition to the Motion for
Issuance of Writ of Possession.
On May 2, 1995, in opposition to private
respondent's Motion for Issuance of writ of Possession,
petitioner led a "Motion to Compel Private Respondent to
Accept Redemption." It was the rst time petitioner ever
asserted the right to redeem subject properties under
Section 78 of R.A. No. 337, the General Banking Act;
theorizing that the original mortgagee, being a credit
institution, its assignment of the mortgage credit to
petitioner did not remove petitioner from the coverage of
Section 78 of R.A. No. 337. Therefore, it should have the
right to redeem subject properties within one year from
registration of the auction sale, theorized the petitioner
which concluded that in view of its "right of redemption,"
the issuance of the titles over subject parcels of land to
the private respondent was irregular and premature.
 In its Order of July 21, 1995, the trial court, presided
over by Judge Napoleon Inoturan, denied private
respondent's motion for a writ of possession, opining that
Section 78 of the General Banking Act was applicable and
therefore, the petitioner had until October 21, 1995 to
redeem the said parcels of land, said Order ruled as
follows:
"It is undisputed that Intercon is a
credit institution from which defendant
obtained a loan secured with a real estate
mortgage over four (4) parcels of land.
Assuming that the mortgage debt had not
been assigned to plaintiff, there is then no
question that defendant would have a right of
redemption in case of foreclosure, judicially
or extrajudicially, pursuant to the above
quoted Section 78 of RA 337, as amended.
However, the pivotal issue here is whether or not the
defendant lost its right of redemption by virtue of the
assignment of its mortgage debt by Intercon to plaintiff, which
is not a bank or credit institution. The issue is resolved in the
negative. The right of redemption in this case is vested by law
and is therefore an absolute privilege which defendant may not
lose even though plaintiff-assignee is not a bank or credit
institution (Tolentino versus Court of Appeals, 106 SCRA
. Indeed, a contrary ruling will lead to a possible
circumvention of Section 78 because all that may be needed
to deprive a defaulting mortgagor of his right of redemption is
to assign his mortgage debt from a bank or credit institution to
one which is not. Protection of defaulting mortgagors, which is
the avowed policy behind the provision, would not be
achieved if the ruling were otherwise. Consequently,
defendant still possesses its right of redemption which it may
exercise up to October 21, 1995 only, which is one year from
the date of registration of the certificate of sale of subject
properties (GSIS versus Iloilo, 175 SCRA 19, citing Limpin
versus IAC, 166 SCRA 87).
Since the period to exercise
defendant's right of redemption has not yet
expired, the cancellation of defendant's
transfer certi cates of title and the issuance
of new ones in lieu thereof in favor of plaintiff
are therefore illegal for being premature,
thereby necessitating reconveyance (see
Sec. 63 (a) PD 1529, as amended).
WHEREFORE, the Court hereby rules as
follows:
(1) The Motion for Issuance of Writ of
Possession is hereby denied;
(2) Plaintiff is directed to accept the
redemption on or before October 21,
1995 in an amount computed
according to the terms stated in the
Writ of Execution dated July 15, 1994
plus all other related costs and
expenses mentioned under Section 78,
RA 337, as amended; and
(3) The Register of Deeds of Valenzuela,
Bulacan is directed (a) to reconvey to
the defendant the following titles of the
four (4) parcels of land, namely TCT
Nos. V-38878, V-38879, V-38880, and
V-38881, now in the name of plaintiff,
and (b) to register the certi cate of sale
dated October 7, 1994 and the Order
con rming the sale dated February 10,
1995 by a brief memorandum thereof
upon the transfer certi cates of title to
be issued in the name of defendant,
 pursuant to Sec. 63 (a) PD 1529, as I
amended.
THE RESPONDENT COURT OF APPEALS
The Omnibus Motion dated June 5, ERRED GRAVELY IN HOLDING THAT THE
1995, together with the Opposition thereto, COURT OF APPEALS (TWELFTH
is now deemed resolved. DIVISION) IN CA G.R. SP NO. 35086 HAD
SO ORDERED." 4 RESOLVED "WITH FINALITY" THAT
PETITIONER HUERTA ALBA HAD NO
Private respondent interposed a Motion for RIGHT OF REDEMPTION BUT ONLY THE
Reconsideration seeking the reversal of the Order but to EQUITY OF REDEMPTION.
no avail. In its Order dated September 4, 1995, the trial II
court denied the same.
THE RESPONDENT COURT OF APPEALS
To attack and challenge the aforesaid order of July ERRED GRAVELY IN IGNORING THAT
21, 1995 and subsequent Order of September 4, 1995 of PETITIONER HUERTA ALBA POSSESSES THE
the trial court, the private respondent led with this court a ONE-YEAR RIGHT OF REDEMPTION UNDER
Petition for Certiorari, Prohibition and Mandamus,
SECTION 78, R.A. NO. 337 (THE GENERAL
docketed as G.R. No. 121893, but absent any special and
BANKING ACT).
cogent reason shown for entertaining the same, the Court
referred the petition to the Court of Appeals, for proper III
determination. THE RESPONDENT COURT OF APPEALS
Docketed as G.R. No. 387457 on November 14, ERRED GRAVELY IN HOLDING THAT PRIVATE
1996, the Court of Appeals gave due course to the petition RESPONDENT SYNDICATED MANAGEMENT
GROUP, INC. IS ENTITLED TO THE ISSUANCE
and set aside the trial court's Order dated July 21, 1995
OF A WRIT OF POSSESSION OVER THE
and Order dated September 4, 1995.
SUBJECT PROPERTY.
In its Resolution of March 11, 1997, the Court of 5

Appeals denied petitioner's Motion for Reconsideration of In its comment on the petition, private respondent
the Decision promulgated on November 14, 1996 in CA- countered that:
G.R. No. 38747. ESCacI

"A. THE HONORABLE COURT OF

Undaunted, petitioner has come to this Court via APPEALS CORRECTLY HELD
the present petition, placing reliance on the assignment of THAT IT RESOLVED WITH
errors, that: FINALITY IN C.A.-G.R. SP NO.
35086 THAT PETITIONER ONLY
 HAD THE RIGHT OF REDEMPTION OF REDEMPTION UNDER SECTION 78,
IN RESPECT OF THE SUBJECT R.A. NO. 337.
PROPERTIES.
II.
11. THE PETITION IS AN INSIDIOUS AND
THERE IS NO ESTOPPEL HERE. PETITIONER
UNDERHANDED ATTEMPT TO EVADE
HUERTA ALBA INVOKED ITS RIGHT OF
THE FINALITY OF VARIOUS
REDEMPTION UNDER SECTION 78, R.A. NO.
DECISIONS, RESOLUTIONS AND
337 IN TIMELY FASHION, i.e.,
ORDERS WHICH HELD THAT,
PETITIONER ONLY POSSESSES THE
AFTER CONFIRMATION BY THE COURT
OF THE FORECLOSURE SALE, AND
EQUITY OF REDEMPTION IN
WITHIN ONE (1) YEAR FROM THE DATE
RESPECT OF THE SUBJECT
OF REGISTRATION OF THE
PROPERTIES.
CERTIFICATE OF SALE.
12. PETITIONER IS BARRED BY
III.
ESTOPPEL FROM BELATEDLY
RAISING THE ISSUE OF ITS THE PRINCIPLE OF 'THE LAW OF THE
ALLEGED 'RIGHT OF CASE' HAS ABSOLUTELY NO BEARING
REDEMPTION. HERE:
13. IN HOLDING THAT THE (1)
PETITIONER HAD THE 'RIGHT OF THE RIGHT OF REDEMPTION UNDER
REDEMPTION' OVER THE SECTION 78, R.A. NO. 337 IS IN FACT
SUBJECT PROPERTIES, THE PREDICATED UPON THE FINALITY AND
TRIAL COURT MADE A MOCKERY CORRECTNESS OF THE DECISION IN
OF THE 'LAW OF THE CASE."' 6 CIVIL CASE NO. 89-5424. AaHcIT

And by way of Reply, petitioner argued, that: (2)

I. THUS, THE RTC'S ORDER RECOGNIZING

THE COURT OF APPEALS IN CA G.R. SP
NO. 35086 COULD NOT HAVE POSSIBLY
RESOLVED THEREIN — WHETHER WITH
FINALITY OR OTHERWISE — THE ISSUE
OF PETITIONER HUERTA ALBA'S RIGHT
PETITIONER HUERTA ALBA'S RIGHT OF
REDEMPTION UNDER SECTION 78, R.A.
NO. 337 DOES NOT IN ANY WAY HAVE
THE EFFECT OF AMENDING,
MODIFYING, OR SETTING ASIDE THE
DECISION IN CIVIL CASE NO. 89-5424.
 The above arguments and counter-arguments
advanced relate to the pivotal issue of whether or not the
petitioner has the one-year right of redemption of subject
properties under Section 78 of Republic Act No. 337
otherwise known as the General Banking Act.
The petition is not visited by merit.
Petitioner's assertion of right of redemption under
Section 78 of Republic Act No. 337 is premised on the
submission that the Court of Appeals did not resolve such
issue in CA-G.R. SP No. 35086; contending thus:
(1)
BY NO STRETCH OF LOGIC CAN THE 20
MARCH 1995 RESOLUTION IN CA G.R. SP
NO. 35086 BE INTERPRETED TO MEAN THE
COURT OF APPEALS HAD RESOLVED 'WITH
FINALITY' THE ISSUE OF WHETHER
PETITIONER HUERTA ALBA HAD THE RIGHT
OF REDEMPTION WHEN ALL THAT THE
RESOLUTION DID WAS TO MERELY NOTE
THE MOTION FOR CLARIFICATION.
(2)
THE 20 MARCH 1995 RESOLUTION IN CA
G.R. SP NO. 35086 IS NOT A FINAL
JUDGMENT, ORDER OR DECREE. IT IS
NOT EVEN A JUDGMENT OR ORDER TO
BEGIN WITH. IT ORDERS NOTHING; IT
ADJUDICATES NOTHING.
(3)
PETITIONER HUERTA ALBA'S RIGHT OF
REDEMPTION UNDER SECTION 78, R.A.
NO. 37 WAS NOT AN ISSUE AND WAS NOT
IN ISSUE, AND COULD NOT HAVE
POSSIBLY BEEN AN ISSUE NOR IN ISSUE,
IN CA G.R. SP NO. 35086.
(4)
THE 30 SEPTEMBER 1994 DECISION IN
CA G.R. SP NO. 35086 HAVING ALREADY
BECOME FINAL EVEN BEFORE THE
FILING OF THE MOTION FOR
CLARIFICATION, THE COURT OF
APPEALS NO LONGER HAD ANY
JURISDICTION TO ACT OF THE MOTION
OR ANY OTHER MATTER IN CA G.R. SP
NO. 35086, EXCEPT TO MERELY NOTE
THE MOTION.
II.
IN STARK CONTRAST, THE ISSUE OF
PETITIONER HUERTA ALBA'S RIGHT OF
REDEMPTION UNDER SECTION 78, R.A.
NO. 337 WAS DIRECTLY RAISED AND
JOINED BY THE PARTIES, AND THE
SAME DULY RESOLVED BY THE TRIAL
COURT.
III.
THE RIGHT OF REDEMPTION UNDER
SECTION 78 OF R.A. NO. 337 IS
MANDATORY AND AUTOMATICALLY
EXISTS BY LAW. THE COURTS ARE
DUTY-BOUND TO RECOGNIZE SUCH
RIGHT.
IV.
 EQUITABLE CONSIDERATIONS WEIGH
HEAVILY IN FAVOR OF PETITIONER
HUERTA ALBA, NOT THE LEAST OF
WHICH IS THE WELL-SETTLED POLICY OF
THE LAW TO AID RATHER THAN DEFEAT
THE RIGHT OF REDEMPTION.
V.
THEREFORE THE 21 JULY 1995 AND 04
SEPTEMBER 1995 ORDERS OF THE
TRIAL COURT ARE VALID AND PROPER
IN ACCORDANCE WITH THE MANDATE
OF THE LAW.
From the various decisions, resolutions and orders
a quo it can be gleaned that what petitioner has been
adjudged to have was only the equity of redemption over
subject properties. On the distinction between the equity
of redemption and right of redemption, the case of
Gregorio Y. Limpin vs. Intermediate Appellate Court, 7
comes to the fore. Held the Court in the said case:
"The equity of redemption is, to be
sure, different from and should not be
confused with the right of redemption.
The right of redemption in relation to a
mortgage – understood in the sense of a
prerogative to re-acquire mortgaged property
after registration of the foreclosure sale –
exists only in the case of the extrajudicial
foreclosure of the mortgage. No such right is
recognized in a judicial foreclosure except only
where the mortgagee is the Philippine National
Bank or a bank or banking institution.
Where a mortgage is foreclosed
extrajudicially, Act 3135 grants to the
mortgagor the right of redemption within one
(1) year from the registration of the sheriff's
certificate of foreclosure sale.
Where the foreclosure is judicially
effected, however, no equivalent right of
redemption exists. The law declares that a
judicial foreclosure sale 'when con rmed be
an order of the court, . . . shall operate to
divest the rights of all the parties to the action
and to vest their rights in the purchaser,
subject to such rights of redemption as may
be allowed by law.' S uch rights exceptionally
'allowed by law' (i.e., even after con rmation
by an order of the court) are those granted
by the charter of the Philippine National Bank
(Acts No. 2747 and 2938), and the General
Banking Act (R.A. 337). These laws confer
on the mortgagor, his successors in interest
or any judgment creditor of the mortgagor,
the right to redeem the property sold on
foreclosure — after con rmation by the court
of the foreclosure sale — which right may be
exercised within a period of one (1) year,
counted from the date of registration of the
certi cate of sale in the Registry of Property.
But, to repeat, no such right of redemption
exists in case of judicial foreclosure of a
mortgage if the mortgagee is not the PNB or
a bank or banking institution. In such a case,
the foreclosure sale, 'when con rmed by an
order of the court. . . shall operate to divest
the rights of all the parties to the action and
to vest their rights in the purchaser.' There
 then exists only what is known as the equity
of redemption. This is simply the right of the
defendant mortgagor to extinguish the
mortgage and retain ownership of the
property by paying the secured debt within
the 90-day period after the judgment
becomes nal, in accordance with Rule 68, or
even after the foreclosure sale but prior to its
confirmation.
Section 2, Rule 68 provides that —
'. . . If upon the trial . . . the court shall
nd the facts set forth in the complaint to be
true, it shall ascertain the amount due to the
plaintiff upon the mortgage debt or
obligation, including interest and costs, and
shall render judgment for the sum so found
due and order the same to be paid into court
within a period of not less than ninety (90)
days from the date of the service of such
order, and that in default of such payment the
property be sold to realize the mortgage debt
and costs.'
This is the mortgagor's equity (not
right) of redemption which, as above stated,
may be exercised by him even beyond the
90-day period 'from the date of service of the
order,' and even after the foreclosure sale
itself, provided it be before the order of con
rmation of the sale. After such order of con
rmation, no redemption can be effected any
longer." 8 (Emphasis supplied)
Petitioner failed to seasonably invoke its purported
right under Section 78 of R.A.
No. 337.
Petitioner avers in its petition that the Intercon,
predecessor in interest of the private respondent, is a
credit institution, such that Section 78 of Republic Act No.
337 should apply in this case. Stated differently, it is the
submission of petitioner that it should be allowed to
redeem subject properties within one year from the date
of sale as a result of the foreclosure of the mortgage
constituted thereon.
The pivot of inquiry here therefore, is whether the
petitioner seasonably invoked its asserted right under
Section 78 of R.A. No. 337 to redeem subject properties.
Petitioner theorizes that it invoked its "right" in "timely
fashion", that is, after con rmation by the court of the
foreclosure sale, and within one (1) year from the date of
registration of the certi cate of sale. Indeed, the facts
show that it was only on May 2, 1995 when, in opposition
to the Motion for Issuance of Writ of Possession, did
petitioner le a Motion to Compel Private Respondent to
Accept Redemption, invoking for the very rst time its
alleged right to redeem subject properties under to
Section 78 of R.A. No.
337.
In light of the aforestated facts, it was too late in the
day for petitioner to invoke a right to redeem under
Section 78 of R.A. No. 337. Petitioner failed to assert a
right to redeem in several crucial stages of the
proceedings.
For instance, on September 7, 1994, when it led
with the trial court an Ex-part Motion for Clari cation,
petitioner failed to allege and prove that private
respondent's predecessor in interest was a credit
institution and therefore, Section 78 of R.A. No. 337 was
applicable. Petitioner merely asked the trial court to clarify
whether the sale of subject properties was execution sale
or judicial foreclosure sale.
So also, when it presented before the trial court an
Exception to the Order and Motion to Set Aside Said
Order dated October 13, 1994, petitioner again was silent
on its alleged right under Section 78 of R.A. No. 337, even
as it failed to show that private respondent's predecessor
in interest is a credit institution. Petitioner just argued that
the aforementioned Order materially altered the trial
court's Decision of April 30, 1992.
Then, too, nothing was heard from petitioner on its
alleged right under Section 78 of R.A. No. 337 and of the
predecessor in interest of private respondent as a credit
institution, when the trial court came out with an order on
February 10, 1995, con rming the sale of subject
properties in favor of private respondent and declaring
that all pending incidents with respect to the Order dated
September 26, 1994 had become moot and academic.
Similarly, when petitioner led on February 27, 1995
a Motion for Clari cation with the Court of Appeals,
seeking "clari cation" of the date of commencement of the
one (1) year redemption period for the subject properties,
petitioner never intimated any alleged right under Section
78 of R.A. No. 337 nor did it invite attention to its present
stance that private respondent's predecessor -in-interest
was a credit institution. Consequently, in its Resolution
dated March 20, 1995, the Court of Appeals ruled on the
said motion thus:
"But we never made any
pronouncement on the one-year right of
redemption of petitioner because, in the rst
place, the foreclosure in this case is judicial,
and as such. the mortgagor has only the
equity, not the right of redemption, . . . While it
may be true that under Section 78 of R.A. 337
as amended, otherwise known as the General
Banking Act, a mortgagor of a bank, banking
or credit institution, whether the foreclosure
was done judicially or extrajudicially, has a
period of one year from the auction sale within
which to redeem the foreclosed property, the
question of whether the Syndicated
Management Group. Inc., is bank or credit
institution was never brought before us
squarely, and it is indeed odd and strange that
petitioner would now sarcastically ask a
rhetorical question in its motion for clari
cation." 9 (Emphasis supplied).
AaHcIT
If petitioner were really acting in good faith, it would
have ventilated before the Court of Appeals in CA-G.R.
No. 35086 its alleged right under Section 78 of R.A. No.
337; but petitioner never did do so.
Indeed, at the earliest opportunity, when it
submitted its answer to the complaint for judicial
foreclosure, petitioner should have alleged that it was
entitled to the bene cial provisions of Section 78 of R.A.
No. 337 but again, it did not make any allegation in its
answer regarding any right thereunder. It bears stressing
that the applicability of Section 78 of R.A. No. 337 hinges
on the factual question of whether or not private
respondent's predecessor in interest was a credit
institution. As was held in Limpin, a judicial foreclosure
sale, "when con rmed by an order of the court, . . . shall
operate to divest the rights of all the parties to the action
and to vest their rights in the purchaser, subject to such
rights of redemption as may be allowed by law'," 10 which
confer on the mortgagor, his successors in interest or any
judgment creditor of the mortgagor, the right to redeem
the property sold on foreclosure after con rmation by the
court of the judicial foreclosure sale. Thus, the claim that
petitioner is entitled to the bene cial provisions of Section
78 of R.A. No. 337 — since private respondent's
predecessor-in-interest is a credit institution — is in the
nature of a compulsory counterclaim which should have
been averred in petitioner's answer to the compliant for
judicial foreclosure.
". . . A counterclaim is, most broadly, a cause
of action existing in favor of the defendant
against the plaintiff. More narrowly, it is a
claim whic, if established, will defeat or in
some way qualify a judgment or relief to
which plaintiff is otherwise entitled. It is
sometimes de ned as any cause of action
arising in contract available against any
action also arising in contract and existing at
the time of the commencement of such an
action. It is frequently de ned by the codes
as a cause of action arising out of the
contract or transaction set forth in the
complaint as the foundation of the plaintiff's
claim, or connected with the subject of the
action." 11 (emphasis supplied)
"The counterclaim is in itself a distinct
and independent cause of action, so that
when properly stated as such, the defendant
becomes, in respect to the matters stated by
him, an actor, and there are two
simultaneous actions pending between the
same parties, wherein each is at the same
time both a plaintiff and a defendant.
Counterclaim is an offensive as well as a
defensive plea and is not necessarily con
ned to the justice of the plaintiff's claim. It
represents the right of the defendant to have
the claims of the parties counterbalanced in
whole or in part, and judgment to be entered
in excess, if any. A counterclaim stands on
the same footing, and is to be tested by the
same rules, as if it were an independent
action." 12 (emphasis supplied)
The very purpose of a counterclaim would have
been served had petitioner alleged in its answer its
purported right under Section 78 of R.A. No. 337:
". . . The rules of counterclaim are
designed to enable the disposition of a whole
controversy of interested parties' con icting
claims, at one time and in one action,
provided all parties' be brought before the
court and the matter decided without
prejudicing the rights of any party." 13
The failure of petitioner to seasonably assert its
alleged right under Section 78 of R.A. No. 337 precludes
it from so doing at this late stage case. Estoppel may be
successfully invoked if the party fails to raise the question
in the early stages of the proceedings. 14 Thus, "a party to
a case who failed to invoke his claim in the main case,
while having the opportunity to do so, will be precluded,
subsequently, from invoking his claim, even if it were true,
after the decision has become nal, otherwise the judgment
may be reduced to a mockery and the administration of
justice may be placed in disrepute." 15
All things viewed in proper perspective, it is
decisively clear that the trial court erred in still allowing
petitioner to introduce evidence that private respondent's
predecessor- in-interest was a credit institution, and to
thereafter rule that the petitioner was entitled to avail of
the provisions of Section 78 of R.A. No. 337. In effect, the
trial court permitted the petitioner to accomplish what the
latter failed to do before the Court of Appeals, that is, to
invoke its alleged right under Section 78 of R.A. No. 337
although the Court of Appeals in CA-G.R. No. 35086
already found that 'the question of whether the Syndicated
Management Council Group, Inc. is a bank or credit
institution was never brought before (the Court of
Appeals) squarely." The said pronouncement by the Court
of Appeals unerringly signi ed that petitioner did not make
a timely assertion of any right under Section 78 of R.A.
No. 337 in all the stages of the proceedings below.
Verily, the petitioner has only itself to blame for not
alleging at the outset that the predecessor-in-interest of
the private respondent is a credit institution. Thus, when
the trial court, and the Court of Appeals repeatedly passed
upon the issue of whether or not petitioner had the right of
redemption or equity of redemption over subject
properties in the decisions, resolutions and orders,
particularly in Civil Case No. 89-5424, CA-G.R. CV No.
39243, CA-G.R. SP No. 35086, and CA-G.R. SP No.
38747, it was unmistakable that the petitioner was
adjudged to just have the equity of redemption without any
quali cation whatsoever, that is, without any right of
redemption allowed by law. HCITcA
The "law of case" holds that petitioner has the equity
of redemption without any qualification.
There is, therefore, merit in private respondent's
contention that to allow petitioner to belatedly invoke its
right under Section 78 of R.A. No. 337 will disturb the "law
of the case." However, private respondent's statement of
what constitutes the "law of the case" is not entirely
accurate. The "law of the case" is not simply that the
defendant possesses an equity of redemption. As the
Court has stated, the "law of the case" holds that petitioner
has the equity of the redemption without any quali cation
whatsoever, that is, without the right of redemption
afforded by Section 78 of R.A. No. 337. Whether or not
the "law of the case" is erroneous is immaterial, it still
remains the "law of the case". A contrary rule will
contradict both the letter and spirit of the rulings of the
Court of Appeals in CA-G.R. SP No. 35086, CA-G.R. CV
No. 39243, and CA-G.R. 38747, which clearly saw
through the repeated attempts of petitioner to forestall so
simple a matter as making the security given for a just debt
to answer for its payment.
Hence, in conformity with the ruling in Limpin, the
sale of the subject properties, as con rmed by the Order
dated February 10, 1995 of the trial court in Civil Case No.
89-5424 operated to divest the rights of all the parties to
the action and to vest their rights in private respondent.
There then existed only what is known as the equity of
redemption, which is simply the right of the petitioner to
extinguish the mortgage and retain ownership of the
property by paying the secured debt within the 90 -day
period after the judgment became nal. There being an
explicit nding on the part of the Court of Appeals in its EN BANC
Decision of September 30, 1994 in CA-G.R. No. 35086 —
that the herein petitioner failed to exercise its equity of [G.R. No. L-17500. May 16, 1967.]
redemption within the prescribed period, redemption can
no longer be effected. The con rmation of the sale and the
PEOPLE'S BANK AND TRUST CO. and
issuance of the transfer certi cates of title covering the
ATLANTIC, GULF AND PACIFIC CO. OF
subject properties to private respondent was then, in
MANILA , plaintiffs and appellants, vs.
order. The trial court therefore, has the ministerial duty to
place private respondent in the possession of subject DAHICAN LUMBER
properties. aSTAcH
COMPANY, DAHICAN AMERICAN
LUMBER CORPORATION, and
CONNELL BROS. CO. (PHIL.),
WHEREFORE, the petition is DENIED, and the defendants and appellants.
assailed decision of the Court of Appeals, declaring null
and void the Order dated 21 July 1995 and Order dated 4
Angel S. Gamboa for defendants-appellants.
September 1997 of the Regional Trial Court of Makati City
in Civil Case No. 89-5424, AFFIRMED. No Laurel Law Offices for plaintiffs-appellants.
pronouncement as to costs.
SO ORDERED. SYLLABUS

Melo, Vitug, Panganiban and Gonzaga-Reyes, JJ., 8. REAL ESTATE MORTGAGE;

concur. STIPULATION INCLUDING IN THE LIEN AFTER
ACQUIRED PROPERTIES; VALIDITY THEREOF. —
A stipulation including in the mortgage lien after
acquired properties is common and logical in all cases
where the properties given as collateral are perishable
or subject to inevitable wear and tear or were intended
to be sold, or to be used — thus becoming subject to
the inevitable wear and tear — but with the
understanding that they shall be replaced with others
to be thereafter acquired by the mortgagor. Such
stipulation is neither unlawful nor immoral, its obvious
purpose being to maintain, to the extent allowed by
circumstances, the original value of the properties
given as securities.
9. ID.; ID.; ID.; MACHINERIES INTENDED
FOR AN INDUSTRY; NATURE THEREOF. — Under
Articles 334 and 1877 of the old Civil Code
substantially reproduced in Articles 415 and 2127
respectively of the new Civil Code, the properties in
question being machinery, receptacles, instruments or
replacements intended by the owner of the tenement
for an industry or works which may be carried on in a
building or on a piece of land, and shall tend directly to
meet the needs of the said industry or works, are classi
ed as immovable properties, therefore not covered by
the Chattel Mortgage Law.
10. ID.; ID.; ID.; ID; ID.; SUPPLIERS NOT
FINANCIERS CONSIDERED UNPAID SELLERS. —
Unpaid sellers who were the suppliers or vendors of the
after acquired
properties and not the nanciers, like the defendants
herein can claim a right superior to the lien constituted
on said properties by virtue of the deeds of mortgage
under foreclosure.
' ID.; ID.; ID.; ID.; ID.; FORECLOSURE PRIOR
TO MATURITY OF PROMISSORY NOTE; WHEN
PROPER. — Although an extension of time was given to the
debtor,
considering that when this complaint was led the
debtor was insolvent, it follows that the debtor thereby
lost the bene t of the period unless he gives a guaranty
or security for the debt (Art. 1198, New Civil Code).
Whereas in this case the guaranty given was plainly
inadequate, then the foreclosure was proper because
the collection of the notes were not premature.
DECISION
DIZON, J :
p
On September 8, 1948, Atlantic Gulf & Paci c
Company of Manila, a West Virginia corporation
licensed to do business in the Philippines, —
hereinafter referred to as ATLANTIC — sold and
assigned all its right in the Dahican lumber concession
to Dahican Lumber Company — hereinafter referred
to as DALCO — for the total sum of P500,000.00 of
which only the amount of $ 50,000.00 was paid.
Thereafter, to develop the concession, DALCO
obtained various loans from the People's Bank & Trust
Company — hereinafter referred to as the Bank —
amounting, as of July 13, 1950, to P200,000.00. In
addition, DALCO obtained, through the Bank, a loan
of $250,000.00 from the Export-Import Bank of
Washington D.C., evidenced by ve promissory notes
of $50,000.00 each, maturing on different dates,
executed by both DALCO and the Dahican American
Lumber Corporation, a foreign corporation and a
stockholder of DALCO, — hereinafter referred to as
DAMCO, all payable to the BANK or its order.
As security for the payment of the
abovementioned loans, on July 13, 1950 DALCO
executed in favor of the BANK — the latter acting for
itself and as trustee for the Export, Import Bank of
Washington D. C. — a deed of mortgage covering live
parcels of land situated in the province of Camarines
Norte, together with all the buildings and other
improvements existing thereon and all the personal
properties of the mortgagor located in its place of
business in the municipalities of Mambulao and
Capalonga, Camarines Norte (Exhibit D). On the same
date, DALCO executed a second mortgage on the
same properties in favor of ATLANTIC to secure
payment of the unpaid balance of the sale price of the
lumber concession amounting to the sum of
$450,000.00 (Exhibit G). Both deeds contained the
following provision extending the mortgage lien to
properties to be subsequently acquired — referred to
hereafter as "after acquired properties" — by the
mortgagor:
"All property of every nature and
description taken in exchange or
replacement, and all buildings, machinery,
xtures, tools, equipment and other property
which the Mortgagor may hereafter acquire,
construct, install, attach, or use in, to, upon,
or in connection with the premises, shall
immediately be and become subject to the
lien of this mortgage in the same manner and
to the same extent as if now included therein,
and the Mortgagor shall from time to time
during the existence of this mortgage furnish
the Mortgagee with an accurate inventory of
such substituted and subsequently acquired
property."
Both mortgages were registered in the O ce of
the Register of Deeds of Camarines Norte. In addition
thereto DALCO and DAMCO pledged to the BANK
7,296 shares of stock of DALCO and 9,286 shares of
DAMCO to secure the same obligations.
Upon DALCO's and DAMCO's failure to pay the
fth promissory note upon its maturity, the BANK paid
the same to the Export-Import Bank of Washington
D.C. and the latter assigned to the former its credit and
the rst mortgage securing it. Subsequently, the BANK
gave DALCO and DAMCO up to April 1, 1953 to pay
the overdue promissory note.
After July 13, 1950 — the date of execution of the
mortgages mentioned above — DALCO purchased
various machineries, equipment, spare parts and
supplies in addition to, or in replacement of some of
those already owned and used by it on the date
aforesaid. Pursuant to the provision of the mortgage
deeds quoted heretofore regarding "after acquired
properties", the BANK requested DALCO to submit
complete lists of said properties but the latter failed to
do so. In connection with these purchases, there
appeared in the books of DALCO as due to Connell
Bros. Company (Philippines) — a domestic
corporation who was acting as the general purchasing
agent of DALCO — hereinafter called CONNEL — the
sum of P452,860.55 and to DAMCO, the sum of
P2,151,678.34.
On December 16, 1952, the Board of Directors
of DALCO in a special meeting called for the purpose,
passed a resolution agreeing to rescind the alleged
sales of equipment, spare parts and supplies by
CONNELL and DAMCO to it. Thereafter, the
corresponding agreements of rescission of sale were
executed between DALCO and DAMCO, on the one
hand, and between DALCO and CONNELL, on the
other.
On January 23, 1953, the BANK, in its own
behalf and that of ATLANTIC, demanded that said
agreements be cancelled but CONNELL and DAMCO
refused to do so. As a result, on February 12, 1953,
ATLANTIC and the BANK, commenced foreclosure
proceedings in the Court of First Instance of
Camarines Norte against DALCO and DAMCO. On the
same date they led an ex-parte application for the
appointment of a Receiver and/or for the issuance of a
writ of preliminary injunction to restrain DALCO from
removing its properties. The court granted both
remedies and appointed George U. Evans as
Receiver. Upon defendants' motion, however, the
court, in its order of February 21, 1953, discharged the
Receiver.
On March 2, 1953, defendants led their answer
denying the material allegations of the complaint and
alleging several affirmative defenses and a
counterclaim.
On March 4 of the same year, CONNELL led a
motion for intervention alleging that it was the owner
and possessor of some of the equipments, spare parts
and supplies which DALCO had acquired subsequent
to the execution of the mortgages sought to be
foreclosed and which plaintiffs claimed were covered
by their lien. In its order of March 18, 1953 the Court
granted the motion, as well as plaintiffs' motion to set
aside the order discharging the Receiver.
Consequently, Evans was reinstated.
On April 1, 1953, CONNELL led its answer
denying the material averments of the complaint, and
asserting affirmative defenses and a counterclaim.
Upon motion of the parties, the Court, on
September 30, 1953, issued an order transferring the
venue of the action to the Court of First Instance of
Manila where it was docketed as Civil Case No.
20987.
On August 30, 1958, upon motion of all the
parties, the Court ordered the sale of all the
machineries, equipment and supplies of DALCO, and
the same were subsequently sold for a total
consideration of P175,000.00 which was deposited in
court pending nal determination of the action. By a
similar agreement one half (P87,500.00) of this
amount was considered as representing the proceeds
obtained from the sale of the "undebated properties"
(those not claimed by DAMCO and CONNELL), and
the other half as representing those obtained from the
sale of the "after acquired properties".
After due trial, the Court, on July 15, 1960,
rendered Judgment as follows:
"IN VIEW WHEREOF, the Court:
" Condemns Dahican Lumber
Co. to pay unto People's Bank the sum of
P200,000.00 with 7% interest per annum
from July 13, 1950, plus another sum of
P100,000.00 with 5% interest per annum
from July 13, 1950; plus 10% on both
principal sums as attorney's fees;
Condemns Dahican Lumber Co. to pay into Atlantic
Gulf the sum of P900,000.00 with 4% interest per
annum from July 13, 1950, plus 10% of the principal
as attorney's fees;
. Condemns Dahican Lumber
Co. to pay unto Connel Bros. the sum of
P425,860.55, and to pay unto Dahican
American Lumber Co. the sum of
P2,151,678.34 both with legal interest from
the date of the ling of the respective
answers of those parties, plus 10% of the
principals as attorney's fees;
5. Orders that of the sum realized
from the sale of the properties of
P175,000.00, after deducting the recognized
expenses, one half thereof be adjudicated
unto plaintiffs, the Court no longer specifying
the share of each because of their
announced intention under the stipulation of
facts to 'pool their resources'; as to the other
one-half, the same should be adjudicated
unto both plaintiffs, and defendant Dahican
American and Connell Bros. in the proportion
already set forth on page 9, lines 21, 22 and
23 of the body of this decision; but with the
understanding that whatever plaintiffs and
Dahican American and Connell Bros. should
receive from the P175,000.00 deposited in
the Court shall be applied to the judgments
particularly rendered in favor of each;
6. No other pronouncement as to
costs; but the costs of the receivership as to
the debated properties shall be borne by
People's Bank, Atlantic Gulf, Connell Bros.
and Dahican American Lumber Co., pro
rata."
On the following day, the Court issued the
following supplementary decision:
"IN VIEW WHEREOF, the dispositive
part of the decision is hereby amended in
order to add the following paragraph 6:
4. If the sums mentioned in
paragraphs 1 and 2 are not paid within ninety
(90) days, the Court orders the sale at public
auction if the lands object of the mortgages
to satisfy the said mortgages and costs of
foreclosure."
From the above-quoted decision, all the parties
appealed.
Main contentions of plaintiffs as appellants are
the following: that the "after acquired properties" were
subject to the deeds of mortgage mentioned
heretofore; that said properties were acquired from
suppliers other than DAMCO and CONNELL; that
even granting that DAMCO and CONNELL were the
real suppliers, the rescission of the sales to DALCO
could not prejudice the mortgage lien in favor of
plaintiffs; that considering the foregoing, the proceeds
obtained from the sale of the "after acquired
properties" as well as those obtained from the sale of
the "undebated properties" in the total sum of
P175,000.00 should have been awarded exclusively to
plaintiffs by reason of the mortgage lien they had
thereon; that damages should have been awarded to
plaintiffs against defendants, all of them being guilty of
an attempt to defraud the former when they sought to
rescind the sales already mentioned for the purpose of
defeating their mortgage lien, and nally, that
defendants should have been made to bear all the
expenses of the Receivership, costs and attorney's
fees.
On the other hand, defendants-appellants contend that
the trial court erred: rstly, in not holding that plaintiffs
had no cause of action against them because the
promissory note sued upon was not yet due when the
action to foreclose the mortgages was commenced;
secondly, in not holding that the mortgages aforesaid
were null and void as regards the "after acquired
properties" of DALCO because they were not
registered in accordance with the Chattel Mortgage
Law, the court erring, as a consequence, in holding
that said properties were subject to the mortgage lien
in favor of plaintiffs; thirdly, in not holding that the
provision of the fourth paragraph of each of said
mortgages did not automatically make subject to such
mortgages the "after acquired properties", the only
meaning thereof being that the mortgagor was willing
to constitute a lien over such properties; fourthly, in not
ruling that said stipulation was void as against DAMCO
and CONNELL and in not awarding the proceeds
obtained from the sale of the "after acquired
properties" to the latter exclusively; fthly, in appointing
a Receiver and in holding that the damages suffered
by DAMCO and CONNELL by reason of the
depreciation or loss in value of the "after acquired
properties" placed under receivership was damnum
absque injuria and, consequently, in not awarding to
said parties the corresponding damages claimed in
their counterclaim; lastly, in sentencing DALCO and
DAMCO to pay the costs of the Receivership, instead
of sentencing plaintiffs to pay attorney's fees.
Plaintiffs' brief as appellants submit six
assignments of error, while that of defendants also as
appellants submit a total of seventeen. However, the
multifarious issues thus before Us may be resolved,
directly or indirectly, by deciding the following issues:
Firstly, are the so-called "after acquired
properties" covered by and subject to the deeds of
mortgage subject of foreclosure?; secondly, assuming
that they are subject thereto, are the mortgages valid
and binding on the properties aforesaid in spite of the
fact that they were not registered in accordance with
the provisions of the Chattel Mortgage Law?; thirdly,
assuming again that the mortgages are valid and
binding upon the "after acquired properties", what is
the effect thereon, if any, of the rescission of sales
entered into, on the one hand, between DALCO and
DAMCO and between DALCO and CONNELL, on the
other?; and lastly, was the action to foreclose the
mortgages premature?
5. Under the fourth paragraph of both deeds
of mortgage, it is crystal clear that all property of every
nature and description taken in exchange or
replacement, as well as all buildings, machineries,
xtures, tools, equipments, and other property that the
mortgagor may acquire, construct, install, attach, or
use in, to, upon, or in connection with the premises —
that is, its lumber concession — "shall immediately be
and become subject to the lien" of both mortgages in
the same manner and to the same extent as if already
included therein at the time of their execution. As the
language thus used leaves no room for doubt as to the
intention of the parties, We see no useful purpose in
discussing the matter extensively. Su ce it to say that
the stipulation referred to is common, and We might
say logical, in all cases where the properties given as
collateral are perishable or subject to inevitable wear
and tear or were intended to be sold, or to be used —
thus becoming subject to the inevitable wear and tear and become subject to the lien of this mortgage in the
— but with the understanding — express or implied — same manner and to the same extent as if now
that they shall be replaced with others to be thereafter included therein". No clearer language could have
acquired by the mortgagor. Such stipulation is neither been chosen.
unlawful nor immoral, its obvious purpose being to Conceding, on the other hand, that it is the law
maintain, to the extent allowed by circumstances, the in this jurisdiction that, to affect third persons, a chattel
original value of the properties given as security.
mortgage must be registered and must describe the
Indeed, if such properties were of the nature already
mortgaged chattels or personal properties su ciently to
referred to, it would be poor judgment on the part of
enable the parties and any other person to identify
the creditor who does not see to it that a similar
them, We say that such law does not apply to this
provision is included in the contract.
case.
But defendants contend that, granting without
As the mortgages in question were executed on
admitting, that the deeds of mortgage in question
July 13, 1950 with the old Civil Code still in force, there
cover the "after acquired properties" of DALCO, the
can be no doubt that the provisions of said code must
same are void and ineffectual because they were not
govern their interpretation and the question of their
registered in accordance with the Chattel Mortgage
validity. It happens, however, that Articles 334 and
Law. In support of this and of the proposition that, even
1877 of the old Civil Code are substantially reproduced
if said mortgages were valid, they should not prejudice
in Article 415 and 2127, respectively, of the new Civil
them, the defendants argue (1) that the deeds do not Code. It is, therefore, immaterial in this case whether
describe the mortgaged chattels speci cally, nor were we take the former or the latter as guide in deciding the
they registered in accordance with the Chattel point under consideration.
Mortgage Law; (2) that the stipulation contained in the
Article 415 does not de ne real property but
fourth paragraph thereof constitutes "mere executory
enumerates what are considered as such, among
agreements to give a lien" over the "after acquired
them being machinery, receptacles, instruments or
properties" upon their acquisition; and (3) that any
replacements intended by the owner of the tenement
mortgage stipulation concerning "after acquired
for an industry or works which may be carried on in a
properties" should not prejudice creditors and other
building or on a piece of land, and shall tend directly to
third persons such as DAMCO and CONNELL.
meet the needs of the said industry or works.
The stipulation under consideration strongly
On the strength of the above-quoted legal
belies defendants' contention. As adverted to
provisions, the lower court held that inasmuch as "the
hereinafter, it states that all property of every nature,
chattels were placed in the real properties mortgaged
buildings, machinery, etc. taken in exchange or
to plaintiffs, they came within the operation of Art. 415,
replacement by the mortgagor "shall immediately be
paragraph 5 and Art. 2127 of the new Civil Code."

We find the above ruling in agreement with our
decisions on the subject:
(1) In Berkenkotter vs. Cu Unjieng, 61 Phil.
663, We held that Article 334, paragraph 5 of the Civil
Code (old) gives the character of real property to
machinery, liquid containers, instruments or
replacements intended by the owner of any building or
land for use in connection with any industry or trade
being carried on therein and which are expressly
adapted to meet the requirements of such trade or
industry.
(2) In Cu Unjieng Hijos vs. Mabalacat Sugar
Co., 58 Phil. 439, We held that a mortgage constituted
on a sugar central includes not only the land on which
it is built but also the buildings, machinery and
accessories installed at the time the mortgage was
constituted as well as the buildings, machinery and
accessories belonging to the mortgagor, installed after
the constitution thereof.
It is not disputed in the case at bar that the "after acquired
properties" were purchased by DALCO in connection
with, and for use in the development of its lumber
concession and that they were purchased in addition to,
or in replacement of those already existing in the
premises on July 13, 1950. In law, therefore, they must
be deemed to have been immobilized, with the result that
the real estate mortgages involved herein — which were
registered as such — did not have to be registered a
second time as chattel mortgages in order to bind the
"after acquired properties" and affect third parties.
But defendants, invoking the case of Davao
Sawmill Company vs. Castillo, 61 Phil. 709, claim that
the "after acquired properties" did not become
immobilized because DALCO did not own the whole
area of its lumber concession all over which said
properties were scattered.
The facts in the Davao Sawmill case, however,
are not on all fours with the ones obtaining in the
present. In the former, the Davao Sawmill Company,
Inc. had repeatedly treated the machinery therein
involved as personal property by executing chattel
mortgages thereon in favor of third parties, while in the
present case the parties had treated the "after
acquired properties" as real properties by expressly
and unequivocally agreeing that they shall
automatically become subject to the lien of the real
estate mortgages executed by them. In the Davao
Sawmill decision it was, in fact, stated that "the
characterization of the property as chattels by the
appellant is indicative of intention and impresses upon
the property the character determined by the parties"
(61 Phil. 712, Emphasis supplied). In the present case,
the characterization of the "after acquired properties"
as real property was made not only by one but by both
interested parties. There is, therefore, more reason to
hold that such consensus impresses upon the
properties the character determined by the parties who
must now be held in estoppel to question it.
Moreover, quoted in the Davao Sawmill case
was that of Valdez vs. Central Altagracia Inc. (225 U.S.
58) where it was held that while under the general law
of Puerto Rico machinery placed on property by a
tenant does not become immobilized, yet, when the
tenant places it there pursuant to contract that it shall
belong to the owner, it then becomes immobilized as
to that tenant and even as against his assignees and
creditors who had su cient notice of such stipulation. In
the case at bar it is not disputed that DALCO
purchased the "after acquired properties" to be placed
on, and be used in the development of its lumber
concession, and agreed further that the same shall
become immediately subject to the lien constituted by
the questioned mortgages. There is also abundant
evidence in the record that DAMCO and CONNELL
had full notice of such stipulation and had never
thought of disputing its validity until the present case
was led. Consequently, all of them must be deemed
barred from denying that the properties in question had
become immobilized.
What We have said heretofore sufficiently
disposes of all the arguments adduced by defendants
in support of their contention that the mortgages under
foreclosure are void, and, that, even if valid, are
ineffectual as against DAMCO and CONNELL.
Now to the question of whether or not DAMCO
and CONNELL have rights over the "after acquired
properties" superior to the mortgage lien constituted
thereon in favor of plaintiffs. It is defendants'
contention that in relation to said properties they are
"unpaid sellers"; that as such they had not only a
superior lien on the "after acquired properties" but also
the right to rescind the sales thereof to DALCO.
This contention — it is obvious — would have validity
only if it were true that DAMCO and CONNELL were
the suppliers or vendors of the "after acquired
properties". According to the record, plaintiffs did not
know their exact identity and description prior to the
ling of the case at bar because DALCO, in violation of
its obligation under the mortgages, had failed and
refused therefore to submit a complete list thereof. In
the course of the proceedings, however, when
defendants moved to dissolve the order of receivership
and the writ of preliminary injunction issued by the
lower court, they attached to their motion the lists
marked as Exhibits 1, 2 and 3 describing the properties
aforesaid. Later on, the parties agreed to consider said
lists as identifying and describing the "after acquired
properties", and engaged the services of auditors to
examine the books of DALCO so as to bring out the
details thereof. The report of the auditors and its
annexes (Exhibits V, V-1 — V-4) show that neither
DAMCO nor CONNELL had supplied any of the goods
of which they respectively claimed to be the unpaid
seller; that all items were supplied by different parties,
neither of whom appeared to be DAMCO or
CONNELL; that, in fact, CONNELL collected a 5 per
cent service charge on the net value of all items it
claims to have sold to DALCO and which, in truth, it
had purchased for DALCO as the latter's general
agent; that CONNELL had to issue its own invoices in
addition to those of the real suppliers in order to collect
and justify such service charge.
Taking into account the above circumstances
together with the fact that DAMCO was a stockholder
and CONNELL was not only a stockholder but the
general agent of DALCO, their claim to be the
suppliers of the "after acquired properties" would seem
to be preposterous. The most that can be claimed on
the basis of the evidence is that DAMCO and
CONNELL probably nanced some of the purchases.
But if DALCO still owes them any amount in this
connection, it is clear that, as nanciers, they can not
claim any right over the "after acquired properties"
superior to the lien constituted thereon by virtue of the
deeds of mortgage under foreclosure. Indeed, the
execution of the rescission of sales mentioned
heretofore appears to be but a desperate attempt to
better or improve DAMCO and CONNELL's position by
enabling them to assume the role of "unpaid suppliers"
and thus claim a vendor's lien over the "after acquired
properties". The attempt, of course, is utterly
ineffectual, not only because they are not the "unpaid
sellers" they claim to be but also because there is
abundant evidence in the record showing that both
DAMCO and CONNELL had known and admitted from
the beginning that the "after acquired properties" of
DALCO were meant to be included in the first and
second mortgages under foreclosure.
The claim that Belden, of ATLANTIC, had given
his consent to the rescission, expressly or otherwise,
is of no consequence and does not make the
rescission valid and legally effective. It must be stated
clearly, however, in justice to Belden, that, as a
member of the Board of Directors of DALCO, he
opposed the resolution of December 16, 1952 passed
by said Board and the subsequent rescission of the
sales.
Finally, defendants claim that the action to
foreclose the mortgages led on February 12, 1953 was
premature because the promissory note sued upon did
not fall due until April 1 of the same year, concluding
from this that, when the action was commenced, the
plaintiffs had no cause of action. Upon this question
the lower court says the following in the appealed
judgment:.
"The other is the defense of
prematurity of the causes of action in that
plaintiffs as a matter of grace, conceded an
extension of time to pay up to 1 April, 1953
while the action was led on 12 February
1953, but as to this, the Court taking it that
there is absolutely no debate that Dahican
Lumber Co., was insolvent as of the date of
the ling of the complaint, it should follow that
the debtor thereby lost the benefit to the
period.
'. . . unless he gives a guaranty or
security for the debt . . .' (Art. 1198, New Civil
Code);
and as the guaranty was plainly inadequate
since the claim of plaintiffs reached in the
aggregate, P1,200,000 excluding interest
while the aggregate price of the 'after-acquired'
chattels claimed by Connell under the
rescission contracts was P1,614,675.94, Exh.
1, Exh. V, report of auditors, and as a matter of
fact, almost all the properties were sold
afterwards for only P175,000.00, page 47, Vol.
IV, and the Court understanding that when
the law permits the debtor to enjoy the bene
ts of the period notwithstanding that he is
insolvent by his giving a guaranty for the
debt, that must mean a new and e cient
guaranty, must concede that the causes of
action for collection of the notes were not
premature."
 Very little need be added to the above.
Defendants, however, contend that the lower court
had no basis for nding that, when the action was
commenced, DALCO was insolvent for purposes
related to Article 1198, paragraph 1 of the Civil Code.
We nd, however, that the nding of the trial court is su
ciently supported by the evidence particularly the
resolution marked as Exhibit K which shows that on
December 16, 1952
— in the words of the Chairman of the Board —
DALCO was "without funds, neither does it expect to
have any funds in the foreseeable future" (p. 64,
record on appeal).
The remaining issues, namely, whether or not
the proceeds obtained from the sale of the "after
acquired properties" should have been awarded
exclusively to the plaintiffs or to DAMCO and
CONNELL, and if in law they should be distributed
among said parties, whether or not the distribution
should be pro-rata or otherwise; whether or not
plaintiffs are entitled to damages; and lastly, whether
or not the expenses incidental to the Receivership
should be borne by all the parties on a pro-rata basis
or exclusively by one or some of them are of a
secondary nature as they are already impliedly
resolved by what has been said heretofore.
As regard the proceeds obtained from the sale
of the "after acquired properties" and the "undebated
properties", it is clear, in view of our opinion sustaining
the validity of the mortgages in relation thereto, that
said proceeds should be awarded exclusively to the
plaintiffs in payment of the money obligations secured
by the mortgages under foreclosure.
On the question of plaintiffs' right to recover
damages from the defendants, the law (Articles 1313
and 1314 of the New Civil Code) provides that
creditors are protected in cases of contracts intended
to defraud them, and that any third person who induces
another to violate his contract shall be liable for
damages to the other contracting party. Similar liability
is demandable under Arts. 20 and 21 — which may be
given retroactive effect (Arts. 2252-53) — or under
Arts. 1902 and 2176 of the Old Civil Code.
The facts of this case, as stated heretofore,
clearly show that DALCO and DAMCO, after failing to
pay the fifth promissory note upon its maturity,
conspired jointly with CONNELL to violate the
provisions of the fourth paragraph of the mortgages
under foreclosure by attempting to defeat plaintiffs'
mortgage lien on the "after acquired properties". As a
result, the plaintiffs had to go to court to protect their
rights thus jeopardized. Defendants' liability for
damages is therefore clear.
However, the measure of the damages suffered by the
plaintiffs is not what the latter claim, namely, the
difference between the alleged total obligation secured
by the mortgages amounting to around P1,200,000.00,
plus the stipulated interest and attorney's fees, on the
one hand, and the proceeds obtained from the sale of
the "after acquired properties", and of those that were
not claimed neither by DAMCO nor CONNELL, on the
other. Considering that the sale of the real properties
subject to the mortgages under foreclosure has not
been effected, and considering further the lack of
 evidence showing that the true value of all the
properties already sold was not realized because their
sale was under stress, We feel that We do not have
before Us the true elements or factors that should
determine the amount of damages that plaintiffs are
entitled to recover from defendants. It is, however, our
considered opinion that, upon the facts established, all
the expenses of the Receivership, which was deemed
necessary to safeguard the rights of the plaintiffs,
should be borne by all the defendants, jointly and
severally, in the same manner that all of them should
pay to the plaintiffs, jointly and severally, the attorney's
fees awarded in the appealed judgment.
In consonance with the portion of this decision
concerning the damages that the plaintiffs are entitled
to recover from the defendants, the record of this case
shall be remanded below for the corresponding
proceedings.
Modi ed as above indicated, the appealed
judgment is a rmed in all other respects. With costs.
Concepcion, C.J., Reyes, J.B.L., Regala, Makalintal,
Bengzon, J.P., Zaldivar, Sanchez and Castro, JJ.,
concur.
SECOND DIVISION
[G.R. No. L-58469. May 16, 1983.]
MAKATI LEASING and FINANCE
CORPORATION, petitioner, vs. WEAREVER
TEXTILE MILLS, INC., and HONORABLE
COURT OF APPEALS, respondents.
Loreto C. Baduan for petitioner.
Ramon D. Bagatsing & Assoc. (collaborating
counsel) for petitioner.
Jose V. Mancella for respondent.
SYLLABUS
1. REMEDIAL LAW; PETITION FOR REVIEW;
NOT RENDERED MOOT AND ACADEMIC; WHERE
RIGHT TO QUESTION DECISION, TIMELY
RESERVED. — The contention of private respondent is
without merit. When petitioner returned the subject motor
drive, it made itself unequivocably clear that said action
was without prejudice to a motion for reconsideration of
the Court of Appeals' decision, as shown by the receipt
duly signed by respondent's representative. Considering
that petitioner has reserved its right to question the
propriety of the Court of Appeals' decision, the
contention of private respondent that this petition has
been mooted by such return may not be sustained.
2. CIVIL LAW; PROPERTY; MACHINERY THOUGH
IMMOBILIZED BY DESTINATION IF TREATED BY THE
PARTIES AS A PERSONALTY FOR PURPOSES OF A
CHATTEL MORTGAGE LEGAL, WHERE NO THIRD
PARTY IS PREJUDICED. — The next and the more
crucial question to be resolved in this petition is whether
the machinery in suit is real or personal property from
the point of view of the parties. Examining the records of
the instance case, the Supreme Court found no logical
justification to exclude and rule out, as the appellate
court did, the present case from the application of the
pronouncement in the TUMALAD v. VICENCIO CASE
(41 SCRA 143) where a similar, if not identical issue was
raised. If a house of strong materials, like what was
involved in the Tumalad case may be considered as
personal property for purposes of executing a chattel
mortgage thereon as long as the parties to the contract
so agree and no innocent third party will be prejudiced
thereby, there is absolutely no reason why a machinery,
which is movable in its nature and becomes immobilized
only by destination or purpose, may not be likewise
treated as such. This is really because one who has so
agreed is estopped from denying the existence of the
chattel mortgage.
3. ID.; ID.; ID.; COURT SHOULD NOT MAKE
DISTINCTIONS, WHERE THE LAW DOES NOT. — In
rejecting petitioner's assertion on the applicability of the
Tumalad doctrine, the Court of Appeals lays stress on
the fact that the house involved therein was built on a
land that did not belong to the owner of such house. But
the law makes no distinction with respect to the
ownership of the land on which the house is built and
the Supreme Court should not lay down distinctions not
contemplated by law.
4. ID.; ID.; ID.; CHARACTERIZATION OF
PROPERTY, INDICATIVE OF THE INTENTION OF THE
PARTIES. — It must be pointed out that the
characterization of the subject machinery as chattel by the
private respondent is indicative of intention and impresses
upon the property the character determined by the parties.
As stated in Standard Oil Co. of New York v. Jaramillo,
44 Phil. 630, it is undeniable that the parties to a
contract may by agreement treat as personal property
that which by nature would be real property, as long as
no interest of third parties would be prejudiced thereby.
5. CIVIL LAW; ESTOPPEL; REPRESENTING OR
AGREEING ON THE CONSTITUTION OF A
PROPERTY AS CHATTEL; A CASE THEREOF. —
Private respondent contends that estoppel cannot apply
against it because it had never represented nor agreed
that the machinery in suit he considered as personal
property but was merely required and dictated on by
herein petitioner to sign a printed form of chattel
mortgage which was in a blank format the time of
signing. This contention lacks persuasiveness. As aptly
pointed out by petitioner and not denied by the
respondent, the status of the subject machine as
movable or immovable was never placed in issue
before the lower court and the Court of Appeals except
ins supplemental memorandum in support of the
petition filed in the appellate court.
6. ID.; CONTRACT; TREATING A MACHINERY AS A
CHATTEL; AGREEMENT DEEMED VALID UNLESS
ANNULLED OR VOIDED IN A PROPER ACTION. —
Moreover, even granting that the charge is true, such fact
alone does not render a contract void ab initio, but can only
be a ground for rendering said contract voidable or
annullable pursuant to Article 1390 of the new Civil Code,
by a proper action in court. There is nothing on record
to show that the mortgage has been annulled. Neither is
it disclosed that steps were taken to nullify the same.
7. ID.; ID.; UNDUE BENEFIT OVER A CONTRACT
AT THE EXPENSE OF ANOTHER NOT
COUNTENANCED BY EQUITY. — On the other hand,
as pointed out by petitioner and again not refuted by
respondent, the latter has indubitably benefited from
said contract. Equity dictates that one should not benefit
at the expense of another. Private respondent could not
now therefore, he allowed to impugn the efficacy of the
chattel mortgage after it has benefited therefrom.
DECISION
DE CASTRO, J : p
Petition for review on certiorari of the decision of the
Court of Appeals (now Intermediate Appellate Court)
promulgation August 27, 1981 in CA- G.R. No. SP-
12731, setting aside certain Orders later specified
herein, of Judge Ricardo J. Francisco, as Presiding
Judge of the Court of First Instance of Rizal, Branch VI,
issued in Civil Case No. 36040, as well as the resolution
dated September 22, 1981 of the said appellate court,
denying petitioner's motion for reconsideration.
It appears that in order to obtain financial
accommodations from herein petitioner Makati Leasing
and Finance Corporation, the private respondent
Wearever Textile Mills, Inc., discounted and assigned
several receivables with the former under a Receivable
Purchase Agreement. To secure the collection of the
receivables assigned, private respondent executed a
Chattel Mortgage over certain raw materials inventory
as well as a machinery described as an Artos Aero
Dryer Stentering Range.
Upon private respondent's default, petitioner filed a
petition for extrajudicial foreclosure of the properties
mortgage to it. However, the Deputy Sheriff assigned to
implement the foreclosure failed to gain entry into private
respondent's premises and was not able to effect the
seizure of the aforedescribed machinery. Petitioner
thereafter filed a complaint for judicial foreclosure with
the Court of First Instance of Rizal, Branch VI, docketed
as Civil Case No. 36040, the case before the lower
court.LexLib
Acting on petitioner's application for replevin, the lower
court issued a writ of seizure, the enforcement of which
was however subsequently restrained upon private
respondent's filing of a motion for reconsideration. After
several incidents, the lower court finally issued on
February 11, 1981, an order lifting the restraining order
for the enforcement of the writ of seizure and an order
to break open the premises of private respondent to
enforce said writ. The lower court reaffirmed its stand
upon private respondent's filing of a further motion for
reconsideration.
On July 13, 1981, the sheriff enforcing the seizure
order, repaired to the premises of private
respondent and removed the main drive motor of
the subject machinery.
The Court of Appeals, in certiorari and prohibition
proceedings subsequently filed by herein private
respondent, set aside the Orders of the lower court and
ordered the return of the drive motor seized by the sheriff
pursuant to said Orders, after ruling that the machinery in
suit cannot be the subject of replevin, much less of a
chattel mortgage, because it is a real property pursuant
to Article 415 of the new Civil Code, the same being
attached to the ground by means of bolts and the only
way to remove it from respondent's plant would be to drill
out or destroy the concrete floor, the reason why all that
the sheriff could do to enforce the writ was to take the
main drive motor of said machinery. The appellate court
rejected petitioner's argument that private respondent is
estopped from claiming that the machine is real property
by constituting a chattel mortgage thereon.
A motion for reconsideration of this decision of the Court
of Appeals having been denied, petitioner has brought
the case to this Court for review by writ of certiorari. It is
contended by private respondent, however, that the
instant petition was rendered moot and academic by
petitioner's act of returning the subject motor drive of
respondent's machinery after the Court of Appeals'
decision was promulgated.
The contention of private respondent is without merit.
When petitioner returned the subject motor drive, it
made itself' unequivocably clear that said action was
without prejudice to a motion for reconsideration of
the Court of Appeals decision, as shown by the
receipt duly signed by respondent's representative. 1
Considering that petitioner has reserved its right to
question the propriety of the Court of Appeals'
decision, the contention of private respondent that this
petition has been mooted by such return may not be
sustained.
The next and the more crucial question to be
resolved in this petition is whether the machinery in
suit is real or personal property from the point of view
of the parties, with petitioner arguing that it is a
personalty, while the respondent claiming the
contrary, and was sustained by the appellate court,
which accordingly held that the chattel mortgage
constituted thereon is null and void, as contended by
said respondent. LLpr
A similar, if not identical issue was raised in Tumalad v.
Vicencio, 41 SCRA 143 where this
Court, speaking through Justice J.B.L. Reyes, ruled:
"Although there is no specific statement
referring to the subject house as personal
property, yet by ceding, selling or
transferring a property by way of chattel
mortgage defendants-appellants could only
have meant to convey the house as chattel,
or at least, intended to treat the same as
such, so that they should not now be
allowed to make an inconsistent stand by
claiming otherwise. Moreover, the subject
house stood on a rented lot to which
defendants-appellants merely had a
temporary right as lessee, and although
this can not in itself alone determine the
status of the property, it does so when
combined with other factors to sustain the
interpretation that the parties, particularly
the mortgagors, intended to treat the house
as Personalty. Finally, unlike in the Iya
cases, Lopez vs. Orosa, Jr. & Plaza
 Theatre, Inc. & Leung Yee vs. F.L. Strong
Machinery & Williamson, wherein third
persons assailed the validity of the chattel
mortgage, it is the defendants-appellants
themselves, as debtors mortgagors, who
are attacking the validity of the chattel
mortgage in this case. The doctrine of
estoppel therefore applies to the herein
defendants appellants, having treated the
subject house as personalty."
Examining the records of the instant case, We find no
logical justification to exclude the rule out, as the
appellate court did, the present case from the
application of the abovequoted pronouncement. If a
house of strong materials, like what was involved in the
above Tumalad case, may be considered as personal
property for purposes of executing a chattel mortgage
thereon as long as the parties to the contract so agree
and no innocent third party will be prejudiced thereby,
there is absolutely no reason why a machinery, which is
movable in its nature and becomes immobilized only by
destination or purpose, may not be likewise treated as
such. This is really because one who has so agreed is
estopped from denying the existence of the chattel
mortgage.
In rejecting petitioner's assertion on the applicability of
the Tumalad doctrine, the Court of Appeals lays stress
on the fact that the house involved therein was built on
a land that did not belong to the owner of such house.
But the law makes no distinction with respect to the
ownership of the land on which the house is built and
We should not lay down distinctions not contemplated
by law.
It must be pointed out that the characterization of the
subject machinery as chattel by the private respondent is
indicative of intention and impresses upon the property
the character determined by the parties. As stated in
Standard Oil Co. of New York v. Jaramillo, 44 Phil. 630, it
is undeniable that the parties to a contract may by
agreement treat as personal property that which by
nature would be real property, as long as no interest of
third parties would be prejudiced thereby.
Private respondent contends that estoppel cannot apply
against it because it had never represented nor agreed
that the machinery in suit be considered as personal
property but was merely required and dictated on by
herein petitioner to sign a printed form of chattel mortgage
which was in a blank form at the time of signing. This
contention lacks persuasiveness. As aptly pointed out by
petitioner and not denied by the respondent, the status of
the subject machinery as movable or immovable was
never placed in issue before the lower court and the Court
of Appeals except in a supplemental memorandum in
support of the petition filed in the appellate court.
Moreover, even granting that the charge is true, such fact
alone does not render a contract void ab initio, but can
only be a ground for rendering said contract voidable, or
annullable pursuant to Article 1390 of the new Civil Code,
by a proper action in court. There is nothing on record to
show that the mortgage has been annulled. Neither is it
disclosed that steps were taken to nullify the same. On
the other hand, as pointed out by petitioner and again not
refuted by respondent, the latter has indubitably benefited
from said contract. Equity dictates that one should not
benefit at the expense of another. Private respondent
 could not now therefore, be allowed to impugn the efficacy
of the chattel mortgage after it has benefited therefrom. LexLib
From what has been said above, the error of the appellate
court in ruling that the questioned machinery is real, not
personal property, becomes very apparent. Moreover, the
case of Machinery and Engineering Supplies, Inc. v. CA,
96 Phil. 70, heavily relied upon by said court is not
applicable to the case at bar, the nature of the machinery
and equipment involved therein as real properties never
having been disputed nor in issue, and they were not the
subject of a Chattel Mortgage. Undoubtedly, the Tumalad
case bears more nearly perfect parity with the instant case
to be the more controlling jurisprudential authority.
WHEREFORE, the questioned decision and resolution
of the Court of Appeals are hereby reversed and set
aside, and the Orders of the lower court are hereby
reinstated, with costs against the private respondent.
SO ORDERED.
Makasiar (Chairman), Aquino, Concepcion, Jr., Guerrero
and Escolin, JJ., concur.
Abad Santos, J., concurs in the result.
THIRD DIVISION
[G.R. No. 92989. July 8, 1991.]
PERFECTO DY, JR., petitioner,
vs. COURT OF APPEALS,
GELAC TRADING INC., and
ANTONIO V. GONZALES,
respondents.
Zosa & Quijano Law Offices for petitioner.
Expedito P. Bugarin for respondent GELAC Trading, Inc.
SYLLABUS
1. CIVIL LAW; SPECIAL CONTRACTS; CHATTEL
MORTGAGE; RIGHT OF MORTGAGOR TO SELL
THE PROPERTY MORTGAGED; RULE. — The
mortgagor who gave the property as security under a
chattel mortgage did not part with the ownership over
the same. He had the right to sell it although he was
under the obligation to secure the written consent of
the mortgagee or he lays himself open to criminal
prosecution under the provision of Article par. 2 of the
Revised Penal Code. And even if no consent was
obtained from the mortgagee, the validity of the
sale would still not be affected.
2. ID.; ID.; ID.; ID.; APPLICABLE IN CASE AT BAR.
— We see no reason why Wifredo Dy, as the
chattel mortgagor can not sell the subject tractor.
There is no dispute that the consent of Libra
 Finance was obtained in the instant case. In a
letter dated August 27, 1979, Libra allowed the
petitioner to purchase the tractor and assume the
mortgage debt of his brother. The sale between
the brothers was therefore valid and binding as
between them and to the mortgagee, as well.
3. ID.; ID.; ID.; REMEDY OF MORTGAGEE IN
CASE MORTGAGOR FAILED TO PAY THE
DEBT. — It was Libra Finance which was in
possession of the subject tractor due to Wilfredo's
failure to pay the amortization as a preliminary
step to foreclosure. As mortgagee, he has the
right of foreclosure upon default by the mortgagor
in the performance of the conditions mentioned in
the contract of mortgage. The law implies that the
mortgagee is entitled to possess the mortgaged
property because possession is necessary in
order to enable him to have the property sold.
While it is true that Wilfredo Dy was not in actual
possession and control of the subject tractor, his
right of ownership was not divested from him upon
his default. Neither could it be said that Libra was
the owner of the subject tractor because the
mortgagee can not become the owner of or
convert and appropriate to himself the property
mortgaged (Article 2088, Civil Code). Said
property continues to belong to the mortgagor.
The only remedy given to the mortgagee is to
have said property sold at public auction and the
proceeds of the sale applied to the payment of the
obligation secured by the mortgagee (See
Martinez vs. PNB, 93 Phil. 765, 767 [1953]). There
is no showing that Libra Finance has already
foreclosed the mortgage and that it was the new
owner of the subject tractor. Undeniably, Libra
gave its consent to the sale of the subject tractor
to the petitioner. It was aware of the transfer of
rights to the petitioner.
4. ID.; ID.; ID.; PURCHASER OF MORTGAGED
PROPERTY STEPS INTO THE SHOES OF THE
MORTGAGOR. — Where a third person purchases
the mortgaged property, he automatically steps into
the shoes of the original mortgagor (See Industrial
Finance Corp. vs. Apostol, 177 SCRA 521 [1989]).
His right of ownership shall be subject to the
mortgage of the thing sold to him. In the case at
bar, the petitioner was fully aware of the existing
mortgage of the subject tractor to Libra. In fact,
when he was obtaining Libra's consent to the sale,
he volunteered to assume the remaining balance
of the mortgage debt of Wilfredo Dy which Libra
undeniably agreed to.
5. ID.; ID.; SALE; DELIVERY OF PROPERTY
VESTS OWNERSHIP TO THE VENDEE. —
Article 1496 of the Civil Code states that the
ownership of the thing sold is acquired by the
vendee from the moment it is delivered to him in
any of the ways specified in Articles 1497 to 1501
or in any other manner signifying an agreement
that the possession is transferred from the vendor
to the vendee. We agree with the petitioner that
Articles 1498 and 1499 are applicable in the case
at bar.
6. ID.; ID.; ID.; ID.; RULE ON CONSTRUCTIVE
DELIVERY. — In the instant case, actual delivery
of the subject tractor could not be made. However,
there was constructive delivery already upon the
execution of the public instrument pursuant to
Article 1498 and upon the consent or agreement
of the parties when the thing sold cannot be
immediately transferred to the possession of the
vendee (Article 1499).
7. ID.; ID.; ID.; CONSUMMATION OF SALE; NOT
DEPENDENT ON THE ENCASHMENT OF CHECK.
— The payment of the check was actually intended
to extinguish the mortgage obligation so that the
tractor could be released to the petitioner. It was
never intended nor could it be considered as
payment of the purchase price because the
relationship between Libra and the petitioner is not
one of sale but still a mortgage. The clearing or
encashment of the check which produced the effect
of payment determined the full payment of the
money obligation and the release of the chattel
mortgage. It was not determinative of the
consummation of the sale. The transaction between
the brothers is distinct and apart from the
transaction between Libra and the petitioner. The
contention, therefore, that the consummation of the
sale depended upon the encashment of the check is
untenable.
8. REMEDIAL LAW; CIVIL PROCEDURE;
EXECUTION OF JUDGMENT; EXTENDS ONLY
OVER PROPERTIES BELONGING TO THE
JUDGMENT DEBTOR NOT EXEMPT BY LAW. —
The sale of the subject tractor was consummated
upon the execution of the public instrument on
September 4, 1979. At this time constructive
delivery was already effected. Hence, the subject
tractor was no longer owned by Wilfredo Dy when it
was levied upon by the sheriff in December, 1979.
Well settled is the rule that only properties
unquestionably owned by the judgment debtor and
which are not exempt by law from execution should
be levied upon or sought to be levied upon. For the
power of the court in the execution of its judgment
extends only over properties belonging to the
judgment debtor (Consolidated Bank and Trust
Corp. vs. Court of Appeals, G.R. No. 78771,
January 23, 1991).
9. ID.; EVIDENCE; FRAUD; MUST BE ESTABLISHED
BY CLEAR CONVINCING EVIDENCE.
— There is no sufficient evidence to show that the sale
of the tractor was in fraud of Wilfredo and creditors.
While it is true that Wilfredo and Perfecto are brothers,
this fact alone does not give rise to the presumption that
the sale was fraudulent. Relationship is not a badge of
fraud (Goquiolay vs. Sycip, 9 SCRA 663 [1963]).
Moreover, fraud can not be presumed; it must be
established by clear convincing evidence.
DECISION
GUTIERREZ, JR., J : p
This is a petition for review on certiorari seeking the
reversal of the March 23, 1990 decision of the Court of
Appeals which ruled that the petitioner's purchase of a
farm tractor was not validly consummated and ordered
a complaint for its recovery dismissed.
The facts as established by the records are as follows:
The petitioner, Perfecto Dy and Wilfredo Dy are
brothers. Sometime in 1979, Wilfredo Dy purchased a
truck and a farm tractor through financing extended
by Libra Finance and Investment Corporation (Libra).
Both truck and tractor were mortgaged to Libra as
security for the loan.
The petitioner wanted to buy the tractor from his brother
so on August 20, 1979, he wrote a letter to Libra
requesting that he be allowed to purchase from
Wilfredo Dy the said tractor and assume the mortgage
debt of the latter.
In a letter dated August 27, 1979, Libra thru its
manager, Cipriano Ares approved the petitioner's
request.
Thus, on September 4, 1979, Wilfredo Dy executed a
deed of absolute sale in favor of the petitioner over the
tractor in question.
At this time, the subject tractor was in the
possession of Libra Finance due to Wilfredo Dy's
failure to pay the amortizations.
Despite the offer of full payment by the petitioner to Libra
for the tractor, the immediate release could not be
effected because Wilfredo Dy had obtained financing not
only for said tractor but also for a truck and Libra insisted
on full payment for both.
The petitioner was able to convince his sister, Carol Dy-
Seno, to purchase the truck so that full payment could
be made for both. On November 22, 1979, a PNB check
was issued in the amount of P22,000.00 in favor of
Libra, thus settling in full the indebtedness of Wilfredo
Dy with the financing firm. Payment having been
effected through an out- of-town check, Libra insisted
that it be cleared first before Libra could release the
chattels in question.
Meanwhile, Civil Case No. R-16646 entitled "Gelac
Trading, Inc. v. Wilfredo Dy", a collection case to
recover the sum of P12,269.80 was pending in another
court in Cebu.
On the strength of an alias writ of execution issued on
December 27, 1979, the provincial sheriff was able to
seize and levy on the tractor which was in the
premises of Libra in Carmen, Cebu. The tractor was
subsequently sold at public auction where Gelac
Trading was the alone bidder. Later, Gelac sold the
tractor to one of its stockholders, Antonio Gonzales.
It was only when the check was cleared on January
17, 1980 that the petitioner learned about GELAC
having already taken custody of the subject tractor.
Consequently, the petitioner filed an action to
recover the subject tractor against GELAC Trading
with the Regional Trial Court of Cebu City.
On April 8,1988, the RTC rendered judgment in
favor of the petitioner. The dispositive portion of
the decision reads as follows:
"WHEREFORE, judgment is hereby rendered in
favor of the plaintiff and against
 the defendant, pronouncing that the plaintiff
is the owner of the tractor, subject matter of
this case, and directing the defendants
Gelac Trading Corporation and Antonio
Gonzales to return the same to the plaintiff
herein; directing the defendants jointly and
severally to pay to the plaintiff the amount of
P1,541.00 as expenses for hiring a tractor;
P50,000 for moral damages; P50,000 for
exemplary damages; and to pay the cost."
(Rollo, pp. 35-36)
On appeal, the Court of Appeals reversed the decision
of the RTC and dismissed the complaint with costs
against the petitioner. The Court of Appeals held that the
tractor in question still belonged to Wilfredo Dy when it
was seized and levied by the sheriff by virtue of the alias
writ of execution issued in Civil Case No. R-16646.
The petitioner now comes to the Court raising the
following questions:
A GONZALES ON AUGUST 2, 1980 — AT
"WHETHER OR NOT THE HONORABLE
COURT OF APPEALS MISAPPREHENDED
THE FACTS AND ERRED IN NOT
AFFIRMING THE TRIAL COURT'S FINDING
THAT OWNERSHIP OF THE FARM
TRACTOR HAD ALREADY PASSED TO
HEREIN PETITIONER WHEN SAID
TRACTOR WAS LEVIED ON BY THE
SHERIFF PURSUANT TO AN ALIAS WRIT
OF EXECUTION ISSUED IN ANOTHER CASE
IN FAVOR OF RESPONDENT GELAC
TRADING INC."
B
"WHETHER OR NOT THE HONORABLE
COURT OF APPEALS EMBARKED ON
MERE CONJECTURE AND SURMISE IN
HOLDING THAT THE SALE OF THE
AFORESAID TRACTOR TO PETITIONER
WAS DONE IN FRAUD OF WILFREDO
DY'S CREDITORS, THERE BEING NO
EVIDENCE OF SUCH FRAUD AS FOUND
BY THE TRIAL COURT."
C
"WHETHER OR NOT THE HONORABLE
COURT OF APPEALS
MISAPPREHENDED THE FACTS AND
ERRED IN NOT SUSTAINING THE
FINDING OF THE TRIAL COURT THAT
THE SALE OF THE TRACTOR BY
RESPONDENT GELAC TRADING TO ITS
CORRESPONDENT ANTONIO V.
WHICH TIME BOTH RESPONDENTS
ALREADY KNEW OF THE FILING OF THE
INSTANT CASE WAS VIOLATIVE OF THE
HUMAN RELATIONS PROVISIONS OF
THE CIVIL CODE AND RENDERED THEM
LIABLE FOR THE MORAL AND
EXEMPLARY DAMAGES SLAPPED
AGAINST THEM BY THE TRIAL COURT."
(Rollo, p. 13)
The respondents claim that at the time of the execution
of the deed of sale, no constructive delivery was effected
since the consummation of the sale depended upon the
clearance and encashment of the check which was
issued in payment of the subject tractor.
In the case of Servicewide Specialists Inc. v.
Intermediate Appellate Court. (174 SCRA 80 [1989]),
we stated that:
xxx xxx xxx
"The rule is settled that the chattel mortgagor
continues to be the owner of the property,
and therefore, has the power to alienate the
same; however, he is obliged under pain of
penal liability, to secure the written consent of
the mortgagee. (Francisco, Vicente, Jr.,
Revised Rules of Court in the Philippines,
(1972), Volume IV-s Part I, p. 525) Thus,
the instruments of mortgage are binding,
while they subsist, not only upon the
parties executing them but also upon
those who later, by purchase or
otherwise, acquire the properties referred
to therein.
"The absence of the written consent of the
mortgagee to the sale of the mortgaged
property in favor of a third person, therefore,
effects not the validity of the sale but only
the penal liability of the mortgagor under the
Revised Penal Code and the binding effect
of such sale on the mortgagee under the
Deed of Chattel Mortgage."
xxx xxx xxx
The mortgagor who gave the property as security
under a chattel mortgage did not part with the
ownership over the same. He had the right to sell it
although he was under the obligation to secure the
written consent of the mortgagee or he lays himself
open to criminal prosecution under the provision of
Article 319 par. 2 of the Revised Penal Code. And
even if no consent was obtained from the mortgagee,
the validity of the sale would still not be affected.
prLL
Thus, we see no reason why Wilfredo Dy, as the chattel
mortgagor can not sell the subject tractor. There is no
dispute that the consent of Libra Finance was obtained
in the instant case. In a letter dated August 27, 1979,
Libra allowed the petitioner to purchase the tractor and
assume the mortgage debt of his brother. The sale
between the brothers was therefore valid and binding as
between them and to the mortgagee, as well.
Article 1496 of the Civil Code states that the ownership
of the thing sold is acquired by the vendee from the
moment it is delivered to him in any of the ways
specified in Articles 1497 to 1501 or in any other manner
signing an agreement that the possession is transferred
from the vendor to the vendee. We agree with the
petitioner that Articles 1498 and 1499 are applicable in
the case at bar.
Article 1498 states:
"Art. 1498. When the sale is made through
a public instrument, the execution thereof
shall be equivalent to the delivery of the
thing which is the object of the contract, if
from the deed the contrary does not
appear or cannot clearly be inferred."

xxx xxx xxx
Article 1499 provides:
"Article 1499. The delivery of movable
property may likewise be made by the mere
consent or agreement of the contracting
parties, if the thing sold cannot be
transferred to the possession of the vendee
at the time of the sale, or if the latter already
had it in his possession for any other
reason. (1463a)"
In the instant case, actual delivery of the subject tractor
could not be made. However, there was constructive
delivery already upon the execution of the public
instrument pursuant to Article 1498 and upon the
consent or agreement of the parties when the thing sold
cannot be immediately transferred to the possession of
the vendee. (Art. 1499)
The respondent court avers that the vendor must first
have control and possession of the thing before he
could transfer ownership by constructive delivery. Here,
it was Libra Finance which was in possession of the
subject tractor due to Wilfredo's failure to pay the
amortization as a preliminary step to foreclosure. As
mortgagee, he has the right offoreclosure upon default
by the mortgagor in the performance of the conditions
mentioned in the contract of mortgage. The law implies
that the mortgagee is entitled to possess the mortgaged
property because possession is necessary in order to
enable him to have the property sold.
While it is true that Wilfredo Dy was not in actual
possession and control of the subject tractor, his right of
ownership was not divested from him upon his default.
Neither could it be said that Libra was the owner of the
subject tractor because the mortgagee can not become
the owner of or convert and appropriate to himself the
property mortgaged. (Article 2088, Civil Code) Said
property continues to belong to the mortgagor. The only
remedy given to the mortgagee is to have said property
sold at public auction and the proceeds of the sale
applied to the payment of the obligation secured by the
mortgagee. (See Martinez v. PNB, 93 Phil. 765, 767
[1953]) There is no showing that Libra Finance has
already foreclosed the mortgage and that it was the new
owner of the subject tractor. Undeniably, Libra gave its
consent to the sale of the subject tractor to the
petitioner. It was aware of the transfer of rights to the
petitioner.llcd
Where a third person purchases the mortgaged
property, he automatically steps into the shoes of the
original mortgagor. (See Industrial Finance Corp. v.
Apostol, 177 SCRA 521[1989]). His right of ownership
shall be subject to the mortgage of the thing sold to
him. In the case at bar, the petitioner was fully aware
of the existing mortgage of the subject tractor to Libra.
In fact, when he was obtaining Libra's consent to the
sale, he volunteered to assume the remaining balance
of the mortgage debt of Wilfredo Dy which Libra
undeniably agreed to. cdphil
The payment of the check was actually intended to
extinguish the mortgage obligation so that the tractor
could be released to the petitioner. It was never intended
nor could it be considered as payment of the purchase
price because the relationship between Libra and the
petitioner is not one of sale but still a mortgage. The
clearing or encashment of the check which produced the
effect of payment determined the full payment of the
money obligation and the release of the chattel
mortgage. It was not determinative of the consummation
of the sale. The transaction between the brothers is
distinct and apart from the transaction between Libra and
the petitioner. The contention, therefore, that the
consummation of the sale depended upon the
encashment of the check is untenable.
The sale of the subject tractor was consummated upon
the execution of the public instrument on September 4,
1979. At this time constructive delivery was already
effected. Hence, the subject tractor was no longer owned
by Wilfredo Dy when it was levied upon by the sheriff in
December, 1979. Well settled is the rule that only
properties unquestionably owned by the judgment debtor
and which are not exempt by law from execution should
be levied upon or sought to be levied upon. For the power
of the court in the execution of its judgment extends only
over properties belonging to the judgment debtor.
(Consolidated Bank and Trust Corp. v. Court of Appeals,
G.R. No. 78771, January 23, 1991).
The respondents further claim that at that time the
sheriff levied on the tractor and took legal custody
thereof no one ever protested or filed a third party
claim.
It is inconsequential whether a third party claim has
been filed or not by the petitioner during the time the
sheriff levied on the subject tractor. A person other
than the judgment debtor who claims ownership or
right over levied properties is not precluded, however,
from taking other legal remedies to prosecute his
claim. (Consolidated Bank and Trust Corp. v. Court of
Appeals, supra) This is precisely what the petitioner
did when he filed the action for replevin with the RTC.
Anent the second and third issues raised, the Court
accords great respect and weight to the findings of fact
of the trial court. There is no sufficient evidence to
show that the sale of the tractor was in fraud of
Wilfredo and creditors. While it is true that Wilfredo and
Perfecto are brothers, this fact alone does not give rise
to the presumption that the sale was fraudulent.
Relationship is not a badge of fraud (Goquiolay v.
Sycip, 9 SCRA 663 [1963]). Moreover, fraud can not be
presumed; it must be established by clear convincing
evidence. LexLib
We agree with the trial court's findings that the
actuations of GELAC Trading were indeed violative of
the provisions on human relations. As found by the trial
court, GELAC knew very well of the transfer of the
property to the petitioners on July 14, 1980 when it
received summons based on the complaint for replevin
filed with the RTC by the petitioner. Notwithstanding said
summons, it continued to sell the subject tractor to one
of its stockholders on August 2, 1980.
WHEREFORE, the petition is hereby GRANTED. The
decision of the Court of Appeals promulgated on March
23,1990 is SET ASIDE and the decision of the
Regional Trial Court dated April 8, 1988 is
REINSTATED.
SO ORDERED. THIRD DIVISION
Fernan, C.J., Feliciano and Bidin, JJ., concur.
[G.R. No. 106435. July 14, 1999.]
Davide, Jr., J., took no part.
PAMECA WOOD TREATMENT
PLANT, INC., HERMINIO G. TEVES,
VICTORIA V. TEVES and HIRAM
DIDAY R. PULIDO, petitioners, vs.
HON. COURT OF APPEALS and
DEVELOPMENT BANK OF THE
PHILIPPINES, respondents.

Americo H. Acosta for petitioners.

Bonifacio M. Abad and Vicente Cuison for private
respondent.

SYNOPSIS

This is a review on certiorari of a judgment of the

Court of Appeals a rming in toto the decision of the
Regional Trial Court of Makati to award respondent bank's
de ciency claim, arising from a loan secured by a chattel
mortgage.
The Court denied the petition. It held that since the
Chattel Mortgage Law bars the creditor-mortgagee from
retaining the excess of the sale proceeds, there is a
corollary obligation on the part of the debtor-mortgagor to
pay the de ciency in case of a reduction in the price at
public auction.
As to petitioners' contention that the public auction
sale is void on ground of fraud and inadequacy of price,
the Court ruled that parties may not bring on appeal issues
that were not raised on trial. Petitioners never assailed the
validity of the sale in the RTC and only in the Court of
Appeals did they attempt to prove inadequacy of price.
Moreover, fraud is a serious allegation that requires full
and convincing evidence and may not be inferred from the
lone circumstance that it was only respondent bank that
bid in the sale of the foreclosed properties. TAaIDH
SYLLABUS
1. CIVIL LAW; CHATTEL MORTGAGE LAW (ACT NO.
1508, AS AMENDED); DEBTOR-MORTGAGOR
BARRED FROM RETAINING EXCESS OF SALE
PROCEEDS AND OBLIGED TO PAY DEFICIENCY
IN CASE OF REDUCTION IN PRICE AT PUBLIC
AUCTION. — It is clear from Section 14 of Act No.
1508, as amended that the effects of foreclosure
under the Chattel Mortgage Law run inconsistent
with those of pledge under Article 2115. Whereas, in
pledge, the sale of the thing pledged extinguishes
the entire principal obligation, such that the pledgor
may no longer recover proceeds of the sale in
excess of the amount of the principal obligation,
Section 14 of the Chattel Mortgage Law expressly
entitles the mortgagor to the balance of the
proceeds, upon satisfaction of the principal obligation
and costs. Since the Chattel Mortgage Law bars the
creditor-mortgagee from retaining the excess of the
sale proceeds there is a corollary obligation on the
part of the debtor-mortgagee to pay the deficiency in
case of a reduction in the price at public auction.
(Manila Trading and Supply Co. vs. Tamaraw
Plantation Co., cited in Ablaza vs. Ignacio, G.R. No.
L-11466, May 23, 1958 [unpublished]). We find no
reason to disturb the ruling in Ablaza vs. Ignacio, and
the cases reiterating. it.
2. ID.; CIVIL LAW; ARTICLE 1484 CLEARLY APPLIES
TO SALE OF PERSONAL PROPERTY IN
INSTALLMENT BASIS. — Neither do We nd tenable
the application by analogy of Article 1484 of the Civil
Code to the instant case. As correctly pointed out by
the trial court, the said article applies clearly and
solely to the sale of personal property the price of
which is payable in installments. Although Article
1484, paragraph (3) expressly bars any further
action against the purchaser to recover an unpaid
balance of the price, where the vendor opts to
foreclose the chattel mortgage on the thing sold,
should the vendee's failure to pay cover two or more
installments, this provision is speci cally applicable to
sale on installments.
3. ID.; EQUITY; APPLIED ONLY IN ABSENCE OF
STATUTORY LAW OR JUDICIAL RULES OF
PROCEDURE. — To accommodate petitioners' prayer
even on the basis of equity would be to expand the
application of the provisions of Article 1484 to
situations beyond its speci c purview, and ignore the
language and intent of the Chattel Mortgage Law.
Equity, which has been aptly described as "justice
outside legality", is applied only in the absence of, and
never against, statutory law or judicial rules of
procedure.
4. REMEDIAL LAW; ACTIONS; APPEALS; PARTIES
MAY NOT BRING ON APPEAL ISSUES NOT
RAISED ON TRIAL. — We are also unable to nd
merit in petitioners' submission that the public
auction sale is void on grounds of fraud and
inadequacy of price. Petitioners never assailed the
validity of the sale in the RTC, and only in the Court
of Appeals did they attempt to prove inadequacy of
 price through the documents, i.e., the "Open-End
Mortgage on Inventory" and inventory dated March
31, 1980, likewise attached to their Petition before
this Court. Basic is the rule that parties may not bring
on appeal issues that were not raised on trial. AEcIaH
5. ID.; EVIDENCE; PRESUMPTION OF REGULARITY
IN CONDUCT OF PUBLIC SALE; CASE AT BAR. —
Furthermore, the mere fact that respondent bank
was the sole bidder for the mortgaged properties in
the public sale does not warrant the conclusion that
the transaction was attended with fraud. Fraud is a
serious allegation that requires full and convincing
evidence, and may not be inferred from the lone
circumstance that it was only respondent bank that
bid in the sale of the foreclosed properties. The
sparseness of petitioners' evidence in this regard
leaves Us no discretion but to uphold the
presumption of regularity in the conduct of the public
sale.
6. ID.; ID.; FINDINGS OF FACT OF TRIAL COURT ON
JOINT AND SOLIDARY LIABILITY OF PETITIONER
CORPORATION IN LOAN AFFIRMED ON APPEAL;
CASE AT BAR. — We likewise a rm private
petitioners' joint and several liability with petitioner
corporation in the loan. As found by the trial court
and the Court of Appeals, the terms of the
promissory note unmistakably set forth the solidary
nature of private petitioners' commitment. From the
foregoing, it is clear that private petitioners intended
to bind themselves solidarily with petitioner PAMECA
in the loan. As correctly submitted by respondent
bank, private petitioners are not made to answer for
the corporate act of petitioner PAMECA, but are
made liable because they made themselves co-
makers with PAMECA under the promissory note.
DECISION
GONZAGA-REYES, J:
Before Us for review on certiorari is the decision of
the respondent Court of Appeals in CA G.R. CV No.
27861, promulgated on April 23, 1992, 1 a rming in toto
the decision of the Regional Trial Court of Makati 2 to
award respondent bank's de ciency claim, arising from a
loan secured by chattel mortgage. LLpr
The antecedents of the case are as follows:
On April 17, 1980, petitioner PAMECA Wood
Treatment Plant, Inc. (PAMECA) obtained a loan of
US$267,881.67, or the equivalent of P2,000,000.00 from
respondent Bank. By virtue of this loan, petitioner
PAMECA, through its President, petitioner Herminio C.
Teves, executed a promissory note for the said amount,
promising to pay the loan by installment. As security for
the said loan, a chattel mortgage was also executed over
PAMECA's properties in Dumaguete City, consisting of
inventories, furniture and equipment, to cover the whole
value of the loan.
On January 18, 1984, and upon petitioner
PAMECA's failure to pay, respondent bank extrajudicially
foreclosed the chattel mortgage, and, as sole bidder in the
public auction, purchased the foreclosed properties for a
sum of P322,350.00. On June 29, 1984, respondent bank
led a complaint for the collection of the balance of
P4,366,332.46 3 with Branch 132 of the Regional Trial
DACIHc Court of Makati City against petitioner PAMECA and
 private petitioners herein, as solidary debtors with
PAMECA under the promissory note.
On February 8, 1990, the RTC of Makati rendered
a decision on the case, the dispositive portion of which
we reproduce as follows:
"WHEREFORE, judgment is hereby
rendered ordering the defendants to pay
jointly and severally plaintiff the (1) sum of
P4,366,332.46 representing the de ciency
claim of the latter as of March 31, 1984, plus
21% interest per annum and other charges
from April 1, 1984 until the whole amount is
fully paid and (2) the costs of the suit. SO
ORDERED." 4 cdasia
The Court of Appeals affirmed the RTC decision.
Hence, this Petition.
The petition raises the following grounds:
"1. Respondent appellate court gravely
erred in not reversing the decision of
the trial court, and in not holding that
the public auction sale of petitioner
PAMECA's chattels were tainted with
fraud, as the chattels of the said
petitioner were bought by private
respondent as sole bidder in only 1/6
of the market value of the property,
hence unconscionable and
inequitable, and therefore null and
void.
E. Respondent appellate court gravely
erred in not applying by analogy Article 1484 and
Article 2115 of the Civil Code by reading the spirit of
the law, and taking into consideration the fact that the
contract of loan was a contract of adhesion.
F. The appellate court gravely erred in
holding the petitioners Herminio
Teves, Victoria Teves and Hiram
Diday R. Pulido solidarily liable with
PAMECA Wood Treatment Plant, Inc.
when the intention of the parties was
that the loan is only for the
corporation's benefit." LLphil
Relative to the rst ground, petitioners contend that the
amount of P322,350.00 at which respondent bank bid for
and purchased the mortgaged properties was
unconscionable and inequitable considering that, at the
time of the public sale, the mortgaged properties had a
total value of more than P2,000,000.00. According to
petitioners, this is evident from an inventory dated March
31, 1980, 5 which valued the properties at P2,518,621.00,
in accordance with the terms of the chattel mortgage
contract 6 between the parties that required that the
inventories "be maintained at a level no less than P2
million". Petitioners argue that respondent bank's act of
bidding and purchasing the mortgaged properties for
P322,350.00 or only about 1/6 of their actual value in a
public sale in which it was the sole bidder was fraudulent,
unconscionable and inequitable, and constitutes sufficient
ground for the annulment of the auction sale.
To this, respondent bank contends that the above-
cited inventory and chattel mortgage contract were not in
fact submitted as evidence before the RTC of Makati, and
that these documents were rst produced by petitioners
only when the case was brought to the Court of Appeals.
7 The Court of Appeals, in turn, disregarded these
documents for petitioners' failure to present them in
evidence, or to even allude to them in their testimonies
before the lower court. 8 Instead, respondent court
declared that it is not at all unlikely for the chattels to have
su ciently deteriorated as to have fetched such a low price
at the time of the auction sale. 9 Neither did respondent
court nd anything irregular or fraudulent in the
circumstance that respondent bank was the sole bidder in
the sale, as all the legal procedures for the conduct of a
foreclosure sale have been complied with, thus giving rise
to the presumption of regularity in the performance of
public duties. 10
Petitioners also question the ruling of respondent
court, a rming the RTC, to hold private petitioners, o cers
and stockholders of petitioner PAMECA, liable with
PAMECA for the obligation under the loan obtained from
respondent bank, contrary to the doctrine of separate and
distinct corporate personality. 11 Private petitioners
contend that they became signatories to the promissory
note "only as a matter of practice by the respondent bank",
that the promissory note was in the nature of a contract of
adhesion, and that the loan was for the benefit of the
corporation, PAMECA, alone. 12
Lastly, invoking the equity jurisdiction of the
Supreme Court, petitioners submit that Articles 1484 13
and 2115 14 of the Civil Code be applied in analogy to the
instant case to preclude the recovery of a deficiency
claim. 15
Petitioners are not the rst to posit the theory of the
applicability of Article 2115 to foreclosures of chattel
mortgage. In the leading case of Ablaza vs. Ignacio, 16 the
lower court dismissed the complaint for collection of
deficiency judgment in view of Article 2141 of the Civil
Code, which provides that the provisions of the Civil Code
on pledge shall also apply to chattel mortgages, insofar as
they are not in con ict with the Chattel Mortgage Law. It
was the lower court's opinion that, by virtue of Article
2141, the provisions of Article 2115 which deny the
creditor-pledgee the right to recover de ciency in case the
proceeds of the foreclosure sale are less than the amount
of the principal obligation, will apply.prcd
This Court reversed the ruling of the lower court and
held that the provisions of the Chattel Mortgage Law
regarding the effects of foreclosure of chattel mortgage,
being contrary to the provisions of Article 2115, Article
2115 in relation to Article 2141, may not be applied to the
case.
Section 14 of Act No. 1508, as amended, or the Chattel
Mortgage Law, states:
"xxx xxx xxx
The o cer making the sale shall, within thirty
days thereafter, make in writing a return of his
doings and le the same in the o ce of the
Registry of Deeds where the mortgage is
recorded, and the Register of Deeds shall
record the same. The fees of the o cer for
selling the property shall be the same as the
case of sale on execution as provided in Act
Numbered One Hundred and Ninety, and the
amendments thereto, and the fees of the
Register of Deeds for registering the o cer's
return shall be taxed as a part of the costs of
sale, which the o cer shall pay to the Register
of Deeds. The return shall particularly describe
the articles sold, and state the amount
 received for each article, and shall operate as
a discharge of the lien thereon created by the
mortgage. The proceeds of such sale shall be
applied to the payment, rst, of the costs and
expenses of keeping and sale, and then to the
payment of the demand or obligation secured
by such mortgage, and the residue shall be
paid to persons holding subsequent
mortgages in their order, and the balance, after
paying the mortgage, shall be paid to the
mortgagor or persons holding under him on
demand." (Emphasis supplied)
cdasia
It is clear from the above provision that the effects
of foreclosure under the Chattel Mortgage Law run
inconsistent with those of pledge under Article 2115.
Whereas, in pledge, the sale of the thing pledged
extinguishes the entire principal obligation, such that the
pledgor may no longer recover proceeds of the sale in
excess of the amount of the principal obligation, Section
14 of the Chattel Mortgage Law expressly entitles the
mortgagor to the balance of the proceeds, upon
satisfaction of the principal obligation and costs.
Since the Chattel Mortgage Law bars the creditor-
mortgagee from retaining the excess of the sale proceeds
there is a corollary obligation on the part of the debtor-
mortgagee to pay the de ciency in case of a reduction in
the price at public auction. As explained in Manila Trading
and Supply Co. vs. Tamaraw Plantation Co., 17 cited in
Ablaza vs. Ignacio, supra:
"While it is true that section 3 of Act
No. 1508 provides that 'a chattel mortgage is
a conditional sale', it further provides that it
'is a conditional sale of personal property as
security for the payment of a debt, or for the
performance of some other obligation speci
ed therein.' The lower court overlooked the
fact that the chattels included in the chattel
mortgage are only given as security and not
as a payment of the debt, in case of a failure
of payment. cdtai
The theory of the lower court would
lead to the absurd conclusion that if the
chattels mentioned in the mortgage, given as
security, should sell for more than the
amount of the indebtedness secured, that
the creditor would be entitled to the full
amount for which it might be sold, even
though that amount was greatly in excess of
the indebtedness. Such a result certainly
was not contemplated by the legislature
when it adopted Act No. 1508. There seems
to be no reason supporting that theory under
the provision of the law. The value of the
chattels changes greatly from time to time,
and sometimes very rapidly. If, for example,
the chattels should greatly increase in value
and a sale under that condition should result
in largely overpaying the indebtedness, and
if the creditor is not permitted to retain the
excess, then the same token would require
the debtor to pay the de ciency in case of a
reduction in the price of the chattels between
the date of the contract and a breach of the
condition.
Mr. Justice Kent, in the 12th Edition of his
Commentaries, as well as other authors on the
question of chattel mortgages, have said, that
'in case of a sale under a foreclosure of a
 chattel mortgage, there is no question that the
mortgagee or creditor may maintain an action
for the deficiency, if any should occur.' And the
fact that Act No. 1508 permits a private sale,
such sale is not, in fact, a satisfaction of the
debt, to any greater extent than the value of the
property at the time of the sale. The amount
received at the time of the sale, of course,
always requiring good faith and honesty in
the sale, is only a payment, pro tanto, and an
action may be maintained for a deficiency in
the debt."
We nd no reason to disturb the ruling in Ablaza vs.
Ignacio, and the cases reiterating it. 18
Neither do We nd tenable the application by
analogy of Article 1484 of the Civil Code to the instant
case. As correctly pointed out by the trial court, the said
article applies clearly and solely to the sale of personal
property the price of which is payable in installments.
Although Article 1484, paragraph (3) expressly bars any
further action against the purchaser to recover an unpaid
balance of the price, where the vendor opts to foreclose
the chattel mortgage on the thing sold, should the
vendee's failure to pay cover two or more installments, this
provision is specifically applicable to a sale on
installments.
To accommodate petitioners' prayer even on the
basis of equity would be to expand the application of the
provisions of Article 1484 to situations beyond its speci c
purview, and ignore the language and intent of the Chattel
Mortgage Law. Equity, which has been aptly described as
"justice outside legality", is applied only in the absence of,
and never against, statutory law or judicial rules of
procedure. 19
We are also unable to nd merit in petitioners'
submission that the public auction sale is void on grounds
of fraud and inadequacy of price. Petitioners never
assailed the validity of the sale in the RTC, and only in the
Court of Appeals did they attempt to prove inadequacy of
price through the documents, i.e., the "Open- End
Mortgage on Inventory" and inventory dated March 31,
1980, likewise attached to their Petition before this Court.
Basic is the rule that parties may not bring on appeal
issues that were not raised on trial.LLpr
Having nonetheless examined the inventory and
chattel mortgage document as part of the records, We are
not convinced that they effectively prove that the
mortgaged properties had a market value of at least
P2,000,000.00 on January 18, 1984, the date of the
foreclosure sale. At best, the chattel mortgage contract
only indicates the obligation of the mortgagor to maintain
the inventory at a value of at least P2,000,000.00, but
does not evidence compliance therewith. The inventory,
in turn, was as of March 31, 1980, or even prior to April
17, 1980, the date when the parties entered into the
contracts of loan and chattel mortgage, and is far from
being an accurate estimate of the market value of the
properties at the time of the foreclosure sale four years
thereafter. Thus, even assuming that the inventory and
chattel mortgage contract were duly submitted as
evidence before the trial court, it is clear that they cannot
su ce to substantiate petitioners' allegation of inadequacy
of price.
Furthermore, the mere fact that respondent bank
was the sole bidder for the mortgaged properties in the
 public sale does not warrant the conclusion that the
transaction was attended with fraud. Fraud is a serious
allegation that requires full and convincing evidence, 20
and may not be inferred from the lone circumstance that it
was only respondent bank that bid in the sale of the
foreclosed properties. The sparseness of petitioners'
evidence in this regard leaves Us no discretion but to
uphold the presumption of regularity in the conduct of the
public sale.
We likewise a rm private petitioners' joint and several
liability with petitioner corporation in the loan. As found by
the trial court and the Court of Appeals, the terms of the
promissory note unmistakably set forth the solidary nature
of private petitioners' commitment. Thus:
"On or before May 12, 1980, for value
received, PAMECA WOOD TREATMENT
PLANT, INC., a corporation organized and
existing under the laws of the Philippines,
with principal o ce at 304 El Hogar Filipina
Building, San Juan, Manila, promise to pay
to the order of DEVELOPMENT BANK OF
THE PHILIPPINES at its o ce located at
corner Buendia and Makati Avenues, Makati,
Metro Manila, the principal sum of TWO
HUNDRED SIXTY SEVEN THOUSAND
EIGHT HUNDRED AND EIGHTY ONE &
67/100 US DOLLARS (US$267,881.67) with
interest at the rate of three per cent (3%) per
annum over DBP's borrowing rate for these
funds. Before the date of maturity, we hereby
bind ourselves, jointly and severally, to make
partial payments as follows:"
xxx xxx xxx
"In case of default in the payment of
any installment above, we bind ourselves to
pay DBP for advances . . ."
xxx xxx xxx
"We further bind ourselves to pay
additional interest and penalty charges on
loan amortizations or portion thereof in
arrears as follows:"
xxx xxx xxx
"In addition to the above, we also bind
ourselves to pay for bank advances for
insurance premiums, taxes . . ."
xxx xxx xxx
"We further bind ourselves to
reimburse DBP on a pro-rata basis for all
costs incurred by DBP on the foreign
currency borrowings from where the loan
shall be drawn . . ."
xxx xxx xxx
"In case of non-payment of the amount
of this note or any portion of it on demand,
when due, or any other amount or amounts
due on account of this note, the entire
obligation shall become due and demandable,
and if, for the enforcement of the payment
thereof, the DEVELOPMENT BANK OF THE
PHILIPPINES is constrained to entrust the
case to its attorneys, we jointly and severally
bind ourselves to pay for attorney's fees as
provided for in the mortgage contract, in
 addition to the legal fees and other incidental Romero, Vitug, Panganiban and Purisima, JJ.,
expenses. In the event of foreclosure of the concur.
mortgage securing this note, we further bind
ourselves jointly and severally to pay the
deficiency, if any." (Emphasis supplied) 21
The promissory note was signed by private
petitioners in the following manner: cdll

"PAMECA WOOD TREATMENT PLANT,

INC.
By:
(Sgd) HERMINIO G. TEVES
(For himself & as President of above-named
corporation)
(Sgd) HIRAM DIDAY PULIDO
(Sgd) VICTORIA V. TEVES" 22

From the foregoing, it is clear that private petitioners

intended to bind themselves solidarily with petitioner
PAMECA in the loan. As correctly submitted by
respondent bank, private petitioners are not made to
answer for the corporate act of petitioner PAMECA, but
are made liable because they made themselves co-
makers with PAMECA under the promissory note. LibLex

IN VIEW OF THE FOREGOING, the Petition is

DENIED and the Decision of the Court of Appeals dated
April 23, 1992 in CA G.R. CV No. 27861 is hereby
AFFIRMED. Costs against petitioners.
SO ORDERED.
 FIRST DIVISION
reason for the existence of courts.
[G.R. No. 103576. August 22, 1996.]
ACME SHOE, RUBBER & PLASTIC
CORPORATION and CHUA PAC ,
petitioners, vs. HON. COURT OF
APPEALS, PRODUCERS BANK OF THE
PHILIPPINES and REGIONAL SHERIFF
OF CALOOCAN CITY , respondents.
Sotto & Sotto Law Offices for petitioners.
R. C. Domingo, Jr., & Associates for Producers
Bank of the Philippines.
SYLLABUS
1. REMEDIAL LAW; ACTIONS; APPEALS;
APPEAL FROM JUDGMENT OF LOWER COURTS, NOT
A MATTER OF RIGHT BUT OF SOUND JUDICIAL
DISCRETION. — Except in criminal cases where the
penalty of reclusion perpetua or death is imposed which the
Court so reviews as a matter of course, an appeal from
judgments of lower courts is not a matter of right but of
sound judicial discretion. The circulars of the Court
prescribing technical and other procedural requirements
are meant to weed out unmeritorious petitions that can
unnecessarily clog the docket and needlessly consume the
time of the Court. These technical and procedural rules,
however, are intended to help secure, not suppress,
substantial justice. A deviation from the rigid enforcement
of the rules may thus be allowed to attain the prime
objective for, after all, the dispensation of justice is the core
2. CIVIL LAW; OBLIGATIONS AND
CONTRACTS; CONTRACTS OF SECURITY,
CONSTRUED. — Contracts of security are either
personal or real. In contracts of personal security, such as
a guaranty or a suretyship, the faithful performance of the
obligation by the principal debtor is secured by the
personal commitment of another (the guarantor or surety).
In contracts of real security, such as a pledge, a mortgage
or an antichresis, that ful llment is secured by an
encumbrance of property — in pledge, the placing of
movable property in the possession of the creditor; in
chattel mortgage, by the execution of the corresponding
deed substantially in the form prescribed by law; in real
estate mortgage, by the execution of a public instrument
encumbering the real property covered thereby; and in
antichresis, by a written instrument granting to the creditor
the right to receive the fruits of an immovable property with
the obligation to apply such fruits to the payment of
interest, if owing, and thereafter to the principal of his
credit — upon the essential condition that if the principal
obligation becomes due and the debtor defaults, then the
property encumbered can be alienated for the payment of
the obligation, but that should the obligation be duly paid,
then the contract is automatically extinguished proceeding
from the accessory character of the agreement. As the law
so puts it, once the obligation is complied with, then the
contract of security becomes, ipso facto, null and void.
3. ID.; ID.; CONTRACTS OF SECURITY;
CHATTEL MORTGAGE; COVERS OBLIGATION
EXISTING AT TIME MORTGAGE IS CONSTITUTED;
EFFECT OF PROMISE TO INCLUDE DEBTS THAT ARE
TO BE CONTRACTED. — While a pledge, real estate
mortgage, or antichresis may exceptionally secure after-
incurred obligations so long as these future debts are
accurately described, a chattel mortgage, however, can only
cover obligations existing at the time the mortgage is
constituted. Although a promise expressed in a chattel
mortgage to include debts that are yet to be contracted
can be a binding commitment that can be compelled upon,
the security itself, however, does not come into existence
or arise until after a chattel mortgage agreement covering
the newly contracted debt is executed either by
concluding a fresh chattel mortgage or by amending the
old contract conformably with the form prescribed by the
Chattel Mortgage Law. Refusal on the part of the borrower
to execute the agreement so as to cover the after-incurred
obligation can constitute an act of default on the part of
the borrower of the nancing agreement whereon the
promise is written but, of course, the remedy of
foreclosure can only cover the debts extant at the time of
constitution and during the life of the chattel mortgage
sought to be foreclosed. In the chattel mortgage here
involved, the only obligation speci ed in the chattel
mortgage contract was the P3,000,000.00 loan which
petitioner corporation later fully paid. By virtue of Section
3 of the Chattel Mortgage Law, the payment of the
obligation automatically rendered the chattel mortgage
void or terminated. (Belgian Catholic Missionaries, Inc.,
vs. Magallanes Press, Inc., et al.) The signi cance of the
ruling to the instant problem would be that since the 1978
chattel mortgage had ceased to exist coincidentally with
the full payment of the P3,000,000.00 loan, there no
longer was any chattel mortgage that could cover the new
loans that were concluded thereafter.
4. ID.; CHATTEL MORTGAGE LAW;
EXECUTION OF AFFIDAVIT OF GOOD FAITH, A CLEAR
MANIFESTATION THAT DEBT REFERRED TO IS
CURRENT. — A chattel mortgage, as hereinbefore so
intimated, must comply substantially with the form prescribed
by the Chattel Mortgage Law itself. One of the requisites,
under Section 5 thereof, is an a davit of good faith. While
it is not doubted that if such an a davit is not appended to
the agreement, the chattel mortgage would still be valid
between the parties (not against third persons acting in
good faith), the fact, however, that the statute has
provided that the parties to the contract must execute an
oath makes it obvious that the debt referred to in the law
is a current, not an obligation that is yet merely
contemplated.
5. ID.; DAMAGES; MORAL DAMAGES; NOT
RECOVERABLE BY A JURIDICAL PERSON. — We nd no
merit in petitioner corporation's other prayer that the case
should be remanded to the trial court for a speci c nding
on the amount of damages it has sustained "as a result of
the unlawful action taken by respondent bank against it."
This prayer is not re ected in its complaint which has
merely asked for the amount of P3,000,000.00 by way of
moral damages. In LBC Express, Inc. vs. Court of
Appeals, we have said: "Moral damages are granted in
recompense for physical suffering, mental anguish, fright,
serious anxiety, besmirched reputation, wounded
feelings, moral shock, social humiliation, and similar
injury. A corporation, being an arti cial person and having
existence only in legal contemplation, has no feelings, no
emotions, no senses; therefore, it cannot experience
physical suffering and mental anguish. Mental suffering
can be experienced only be one having a nervous system
and it ows from real ills, sorrows, and griefs of life — all of
which cannot be suffered by respondent bank as an arti
cial person." While Chua Pac is included in the case, the
complaint, however, clearly states that he has merely
been so named as a party in representation of petitioner
corporation.
LEGAL ETHICS; ATTORNEYS; SHOULD
CIRCUMSPECT IN DEALING WITH COURTS. — Petitioner
corporation's counsel could be commended for his zeal in
pursuing his client's cause. It instead turned out to be,
however, a source of disappointment for this Court to read
in petitioner's reply to private respondent's comment on the
petition his so-called "One Final Word;" viz: "In simply
quoting in toto the patently erroneous decision of the trial
court, respondent Court of Appeals should be required to
justify its decision which completely disregarded the basic
laws on obligations and contracts, as well as the clear
provisions of the Chattel Mortgage Law and well-settled
jurisprudence of this Honorable Court; that in the event
that its explanation is wholly unacceptable, this Honorable
Court should impose appropriate sanctions on the erring
justices. This is one positive step in ridding our courts of
law of incompetent and dishonest magistrates especially
members of a superior court of appellate jurisdiction. The
statement is not called for. The Court invites counsel's
attention to the admonition in Guerrero vs. Villamor; thus:
"(L)awyers . . . should bear in mind their basic duty 'to
observe and maintain the respect due to the courts of
justice and judical officers and . . . (to) insist on similar
conduct by others.' This respectful attitude towards the
court is to be observed, 'not for the sake of the temporary
incumbent of the judical o ce, but for the maintenance of
its supreme importance.' And it is 'through a scrupulous
preference for respectful language that a lawyer best
demonstrates his observance of the respect due to the
courts and judicial officers . . .'" The virtues of humility and
of respect and concern for others must still live on even in
an age of materialism. Atty. Francisco R. Sotto, counsel
for petitioners, is admonished to be circumspect in dealing
with the courts.
BE
DECISION
VITUG, J :p
Would it be valid and effective to have a clause in a
chattel mortgage that purports to likewise extend its
coverage to obligations yet to be contracted or incurred?
This question is the core issue in the instant petition for
review on certiorari.
Petitioner Chua Pac, the president and general
manager of co-petitioner "Acme Shoe, Rubber & Plastic
Corporation," executed on 27 June 1978, for and in behalf
of the company, a chattel mortgage in favor of private
respondent Producers Bank of the Philippines. The
mortgage stood by way of security for petitioner's
corporate loan of three million pesos (P3,000,000.00). A
provision in the chattel mortgage agreement was to this
effect —
"(c) If the MORTGAGOR, his heirs,
executors or administrators shall well and
truly perform the full obligation or obligations
above-stated according to the terms thereof,
then this mortgage shall be null and void. . .
.
"In case the MORTGAGOR executes
subsequent promissory note or notes either as
a renewal of the former note, as an extension
thereof, or as a new loan, or is given any other
 kind of accommodations such as overdrafts,
letters of credit, acceptances and bills of
exchange, releases of import shipments on
Trust Receipts, etc., this mortgage shall also
stand as security for the payment of the said
promissory note or notes and/or
accommodations without the necessity of
executing a new contract and this mortgage
shall have the same force and effect as if the
said promissory note or notes and/or
accommodations were existing on the date
thereof. This mortgage shall also stand as
security for said obligations and any and all
other obligations of the MORTGAGOR to the
MORTGAGEE of whatever kind and nature,
whether such obligations have been
contracted before, during or after the
constitution of this mortgage." 1
In due time, the loan of P3,000,000.00 was paid by
petitioner corporation. Subsequently, in 1981, it obtained
from respondent bank additional financial
accommodations totalling P2,700,000.00. 2 These
borrowings were on due date also fully paid.
On 10 and 11 January 1984, the bank yet again
extended to petitioner corporation a loan of one million
pesos (P1,000,000.00) covered by four promissory notes
for P250,000.00 each. Due to nancial constraints, the loan
was not settled at maturity. 3 Respondent bank thereupon
applied for an extrajudicial foreclosure of the chattel
mortgage, hereinbefore cited, with the Sheriff of Caloocan
City, prompting petitioner corporation to forthwith le an
action for injunction, with damages and a prayer for a writ
of preliminary injunction, before the Regional Trial Court
of Caloocan City (Civil Case No. C-12081) . Ultimately, the
court dismissed the complaint and ordered the foreclosure
of the chattel mortgage. It held petitioner corporation
bound by the stipulations, aforequoted, of the chattel
mortgage.
Petitioner corporation appealed to the Court of
Appeals 4 which, on 14 August 1991,
. rmed, "in all respects," the decision of the court a
quo. The motion for reconsideration was denied on 24
January 1992.
The instant petition interposed by petitioner
corporation was initially denied on 04 March 1992 by this
Court for having been insu cient in form and substance.
Private respondent led a motion to dismiss the petition
while petitioner corporation led a compliance and an
opposition to private respondent's motion to dismiss. The
Court denied petitioner's rst motion for reconsideration but
granted a second motion for reconsideration, thereby
reinstating the petition and requiring private respondent to
comment thereon. 5
Except in criminal cases where the penalty of
reclusion perpetua or death is imposed 6 which the Court
so reviews as a matter of course, an appeal from
judgments of lower courts is not a matter of right but of
sound judicial discretion. The circulars of the Court
prescribing technical and other procedural requirements
are meant to weed out unmeritorious petitions that can
unnecessarily clog the docket and needlessly consume
the time of the Court. These technical and procedural
rules, however, are intended to help secure, not suppress,
substantial justice. A deviation from the rigid enforcement
of the rules may thus be allowed to attain the prime
objective for, after all, the dispensation of justice is the
core reason for the existence of courts. In this instance,
once again, the Court is constrained to relax the rules in
order to give way to and uphold the paramount and
overriding interest of justice.
Contracts of security are either personal or real. In
contracts of personal security, such as a guaranty or a
suretyship, the faithful performance of the obligation by
the principal debtor is secured by the personal
commitment of another (the guarantor or surety). In
contracts of real security, such as a pledge, a mortgage
or an antichresis, that ful llment is secured by an
encumbrance of property — in pledge , the placing of
movable property in the possession of the creditor; in
chattel mortgage, by the execution of the corresponding
deed substantially in the form prescribed by law; in real
estate mortgage, by the execution of a public instrument
encumbering the real property covered thereby; and in
antichresis, by a written instrument granting to the creditor
the right to receive the fruits of an immovable property with
the obligation to apply such fruits to the payment of
interest, if owing, and thereafter to the principal of his
credit — upon the essential condition that if the principal
obligation becomes due and the debtor defaults, then the
property encumbered can be alienated for the payment of
the obligation, 7 but that should the obligation be duly paid,
then the contract is automatically extinguished proceeding
from the accessory character 8 of the agreement. As the
law so puts it, once the obligation is complied with, then
the contract of security becomes, ipso facto, null and void.
9
While a pledge, real estate mortgage, or antichresis
may exceptionally secure after-incurred obligations so
long as these future debts are accurately described, 10 a
chattel mortgage, however, can only cover obligations
existing at the time the mortgage is constituted. Although
a promise expressed in a chattel mortgage to include
debts that are yet to be contracted can be a binding
commitment that can be compelled upon, the security
itself, however, does not come into existence or arise until
after a chattel mortgage agreement covering the newly
contracted debt is executed either by concluding a fresh
chattel mortgage or by amending the old contract
conformably with the form prescribed by the Chattel
Mortgage Law. 11 Refusal on the part of the borrower to
execute the agreement so as to cover the after-incurred
obligation can constitute an act of default on the part of
the borrower of the nancing agreement whereon the
promise is written but, of course, the remedy of
foreclosure can only cover the debts extant at the time of
constitution and during the life of the chattel mortgage
sought to be foreclosed.
A chattel mortgage, as hereinbefore so intimated,
must comply substantially with the form prescribed by the
Chattel Mortgage Law itself. One of the requisites, under
Section 5 thereof, is an a davit of good faith. While it is not
doubted that if such an
7. davit is not appended to the agreement, the chattel
mortgage would still be valid between the parties (not
against third persons acting in good faith 12 ), the fact,
however, that the statute has provided that the parties to
the contract must execute an oath that —
". . . (the) mortgage is made for the
purpose of securing the obligation speci ed in
 the conditions thereof, and for no other
purpose, and that the same is a just and valid
obligation, and one not entered into for the
purpose of fraud." 13
makes it obvious that the debt referred to in the law is
a current, not an obligation that is yet merely
contemplated. In the chattel mortgage here involved,
the only obligation speci ed in the chattel mortgage
contract was the P3,000,000.00 loan which petitioner
corporation later fully paid. By virtue of Section 3 of the
Chattel Mortgage Law, the payment of the obligation
automatically rendered the chattel mortgage void or
terminated. In Belgian Catholic Missionaries, Inc., vs.
Magallanes Press, Inc., et al. , 14 the Court said—
". . . A mortgage that contains a
stipulation in regard to future advances in the
credit will take effect only from the date the
same are made and not from the date of the
mortgage." 15
The signi cance of the ruling to the instant problem
would be that since the 1978 chattel mortgage had ceased
to exist coincidentally with the full payment of the
P3,000,000.00 loan, 16 there no longer was any chattel
mortgage that could cover the new loans that were
concluded thereafter.
We nd no merit in petitioner corporation's other prayer
that the case should be remanded to the trial court for
a speci c nding on the amount of damages it has
sustained "as a result of the unlawful action taken by
respondent bank against it." 17 This prayer is not re
ected in its complaint which has merely asked for the
amount of P3,000,000.00 by way of moral damages.
18 In LBC Express, Inc. vs. Court of Appeals,
5. we have said:
"Moral damages are granted in recompense
for physical suffering, mental anguish, fright,
serious anxiety, besmirched reputation,
wounded feelings, moral shock, social
humiliation, and similar injury. A corporation,
being an arti cial person and having
existence only in legal contemplation, has no
feelings, no emotions, no senses; therefore,
it cannot experience physical suffering and
mental anguish. Mental suffering can be
experienced only by one having a nervous
system and it ows from real ills, sorrows, and
griefs of life — all of which cannot be suffered
by respondent bank as an artificial person."
20
While Chua Pac is included in the case, the
complaint, however, clearly states that he has merely
been so named as a party in representation of
petitioner corporation.
Petitioner corporation's counsel could be
commended for his zeal in pursuing his client's cause. It
instead turned out to be, however, a source of
disappointment for this Court to read in petitioner's reply
to private respondent's comment on the petition his so-
called "One Final Word;" viz:
"In simply quoting in toto the patently
erroneous decision of the trial court,
respondent Court of Appeals should be
required to justify its decision which
completely disregarded the basic laws on
 obligations and contracts, as well as the respondent as may still be warranted as an unsecured
clear provisions of the Chattel Mortgage Law creditor. No costs.
and well-settled jurisprudence of this
Honorable Court; that in the event that its Atty. Francisco R. Sotto, counsel for petitioners, is
explanation is wholly unacceptable, this admonished to be circumspect in dealing with the courts.
Honorable Court should impose appropriate
SO ORDERED.
sanctions on the erring justices. This is one
positive step in ridding our courts of law of Kapunan and Hermosisima, Jr., JJ ., concur.
incompetent and dishonest magistrates
especially members of a superior court of Padilla, J ., took no part.
appellate jurisdiction." 21 (Emphasis
Bellosillo, J ., is on leave.
supplied.)
The statement is not called for. The Court invites
counsel's attention to the admonition in Guerrero vs.
Villamor; 22 thus:
"(L)awyers . . . should bear in mind
their basic duty 'to observe and maintain the
respect due to the courts of justice and
judicial o cers and . . . (to) insist on similar
conduct by others.' This respectful attitude
towards the court is to be observed, 'not for
the sake of the temporary incumbent of the
judicial o ce, but for the maintenance of its
supreme importance.' And it is 'through a
scrupulous preference for respectful
language that a lawyer best demonstrates
his observance of the respect due to the
courts and judicial officers . . ..'" 23
The virtues of humility and of respect and concern
for others must still live on even in an age of materialism.
WHEREFORE, the questioned decisions of the
appellate court and the lower court are set aside without
prejudice to the appropriate legal recourse by private
 FIRST DIVISION
[G.R. No. 116363. December 10, 1999.]
SERVICEWIDE SPECIALISTS,
INCORPORATED , petitioner, v s . THE
HON. COURT OF APPEALS, JESUS
PONCE, and ELIZABETH PONCE ,
respondents.
Labaguis, Loyola, Atienza, Felipe, Santos &
Associates for petitioner.
Jesus M. Ponce for private respondents.
SYNOPSIS
Sometime in 1975, respondent spouses bought on
installment a Holden Torana vehicle from CR Tecson
Enterprises. They executed a promissory note and a
chattel mortgage in favor of Tecson, which in turn,
executed a deed of assignment of said promissory note
and chattel mortgage in favor of Filinvest Credit
Corporation. In 1976, respondent spouses transferred
and delivered the vehicle to Tecson Enterprises by way of
sale with assumption of mortgage. In 1978, Filinvest
assigned all its rights and interest over the same
promissory note and chattel mortgage to Servicewide
Specialist Inc. without notice to respondent spouses. Due
to the failure of herein respondents to pay the installments
under the promissory note from October 1977 to March
1978 and despite demands to pay the same or return the
vehicle, petitioner was constrained to le before the
Regional Trial Court of Manila on May 22, 1978, a
complaint for replevin with damages against respondents.
After trial, the lower court found respondent spouses
jointly and solidarily liable to petitioner and were ordered
to pay (a) P26,633.09; plus interest at 14% per annum (b);
25% of the above sum as liquidated damages; (c)
P5,000.00 as attorney's fees. The third party defendant
Tecson was ordered to reimburse the respondent
spouses for the sum that they would pay to petitioner. On
appeal, the Court of Appeals reversed and set aside the
judgment of the Court of Appeals on the principal ground
that respondent spouses were not noti ed of the
assignment to petitioner. Hence, this petition for review.
CIaASH
The Supreme Court found the petition meritorious.
Only notice to the debtor of the assignment of credit is
required. His consent is not required. In contrast, consent
of the creditor-mortgagee to the alienation of the
mortgaged property is necessary in order to bind said
creditor. Accordingly, the decision of the Court of Appeals
was reversed and set aside. The decision of the Regional
Trial Court was affirmed and reinstated.
SYLLABUS
CIVIL LAW; CHATTEL MORTGAGE; ASSIGNEE'S
CONSENT IS NECESSARY IN ORDER TO BIND HIM OF
THE ALIENATION OF THE MORTGAGED THING BY THE
DEBTOR-MORTGAGOR. — When the credit was assigned
to petitioner, only notice to but not the consent of the debtor-
mortgagor was necessary to bind the latter. Applying Article
1627 of the Civil Code, the assignment made to petitioner
includes the accessory rights such as the mortgage. Article
2141, on the other hand, states that the provisions
concerning a contract of pledge shall be applicable to a
chattel mortgage, such as the one at bar, insofar as there is
no con ict with Act No. 1508, the Chattel Mortgage Law. As
provided in Article 2096 in relation to Article 2141 of the
Civil Code, a thing pledged may be alienated by the
pledgor or owner "with the consent of the pledgee." This
provision is in accordance with Act No. 1508 which
provides that "a mortgagor of personal property shall not
sell or pledge such property, or any part thereof,
mortgaged by him without the consent of the mortgagee
in writing on the back of the mortgage and on the margin
of the record thereof in the o ce where such mortgage is
recorded." Although this provision in the chattel mortgage
has been expressly repealed by Article 367 of the Revised
Penal Code, yet under Article 319 (2) of the same Code,
the sale of the thing mortgaged may be made provided
that the mortgagee gives his consent and that the same is
recorded. In any case, applying by analogy Article 2128 of
the Civil Code to a chattel mortgage, it appears that a
mortgage credit may be alienated or assigned to a third
person. Since the assignee of the credit steps into the
shoes of the creditor-mortgagee to whom the chattel was
mortgaged, it follows that the assignee's consent is
necessary in order to bind him of the alienation of the
mortgaged thing by the debtor-mortgagor. This is
tantamount to a novation. As the new assignee,
petitioner's consent is necessary before respondent
spouses' alienation of the vehicle can be considered as
binding against third persons. Petitioner is considered a
third person with respect to the sale with mortgage
between respondent spouses and third party defendant
Conrado Tecson.
REMEDIAL LAW; EVIDENCE; IN CIVIL CASES, THE
BURDEN IS ON THE PARTY WHO WOULD BE
DEFEATED IF NO EVIDENCE IS GIVEN ON EITHER
SIDE. — When Tecson Enterprises assigned the
promissory note and the chattel mortgage to Filinvest, it
was made with respondent spouses' tacit approval. When
Filinvest in turn, as assignee, assigned it further to
petitioner, the latter should have noti ed the respondent
spouses of the assignment in order to bind them. This,
they failed to do. The testimony of petitioner's witness that
notice of assignment was sent to respondent spouses was
stricken off the record. Having asserted the a rmative on
the issue of notice, petitioner should have substantiated
its allegations in order to obtain a favorable judgment. In
civil cases, the burden is on the party who would be
defeated if no evidence is given on either side. Being the
plaintiff in the trial below, petitioner must establish its
case, relying on the strength of its own evidence and not
upon the weakness of that of its opponent. The consent to
the assignment given by respondent spouses to Filinvest
cannot be construed as the spouses' knowledge of the
assignment to petitioner precisely because at the time of
the assignment to the latter, the spouses had earlier sold
the vehicle to another. aEHIDT
DECISION
YNARES-SANTIAGO, J : p
This controversy is between a mortgagor who
alienated the mortgaged property without the consent of
the mortgagee, on the one hand, and the assignee of the
mortgagee to whom the latter assigned his credit without
notice to the mortgagor, on the other hand.
cda
Sometime in 1975, respondent spouses Atty. Jesus and
Elizabeth Ponce bought on installment a Holden Torana
vehicle from C.R. Tecson Enterprises. They executed a
promissory note and a chattel mortgage on the vehicle
dated December 24, 1975 in favor of the C.R. Tecson
Enterprises to secure payment of the note. The mortgage
was registered both in the Registry of Deeds and the Land
Transportation O ce. On the same date, C.R. Tecson
Enterprises, in turn, executed a deed of assignment of
said promissory note and chattel mortgage in favor of
Filinvest Credit Corporation with the conformity of
respondent spouses. The latter were aware of the
endorsement of the note and the mortgage to Filinvest as
they in fact availed of its nancing services to pay for the
car. In 1976, respondent spouses transferred and
delivered the vehicle to Conrado R. Tecson by way of sale
with assumption of mortgage. Subsequently, in 1978,
Filinvest assigned all its rights and interest over the same
promissory note and chattel mortgage to petitioner
Servicewide Specialists Inc. without notice to respondent
spouses. Due to the failure of respondent spouses to pay
the installments under the promissory note from October
1977 to March 1978, and despite demands to pay the
same or to return the vehicle, petitioner was constrained
to le before the Regional Trial Court of Manila on May 22,
1978 a complaint for replevin with damages against them,
docketed as Civil Case No. 115567. In their answer,
respondent spouses denied any liability claiming they had
already returned the car to Conrado Tecson pursuant to
the Deed of Sale with Assumption of Mortgage. Thus, they
led a third party complaint against Conrado Tecson
praying that in case they are adjudged liable to petitioner,
Conrado Tecson should reimburse them.
After trial, the lower court found respondent
spouses jointly and solidarily liable to petitioner, however,
the third party defendant Conrado Tecson was ordered to
reimburse the respondent spouses for the sum that they
would pay to petitioner. 1 On appeal, the Court of Appeals
reversed and set aside the judgment of the court a quo on
the principal ground that respondent spouses were not
noti ed of the assignment of the promissory note and
chattel mortgage to petitioner. 2 Hence, this petition for
review.
The resolution of the petition hinges on whether the
assignment of a credit requires notice to the debtor in
order to bind him. More speci cally, is the debtor-
mortgagor who sold the property to another entitled to
notice of the assignment of credit made by the creditor to
another party such that if the debtor was not noti ed of the
assignment, he can no longer be held liable since he
already alienated the property? Conversely, is the consent
of the creditor-mortgagee necessary when the debtor-
mortgagor alienates the property to a third person?
Only notice to the debtor of the assignment of credit
is required. His consent is not required. In contrast,
consent of the creditor-mortgagee to the alienation of the
mortgaged property is necessary in order to bind said
creditor. To evade liability, respondent spouses invoked
Article 1626 of the Civil Code which provides that "the
debtor who, before having knowledge of the assignment,
pays his creditor shall be released from the obligation."
They argue that they were not noti ed of the assignment
made to petitioner. This provision, however, is applicable
only where the debtor pays the creditor prior to acquiring
knowledge of the latter’s assignment of his credit. It does
not apply, nor is it relevant, to cases of non-payment after
the debtor came to know of the assignment of credit. This
is precisely so since the debtor did not make any payment
after the assignment. LibLex
In the case at bar, what is relevant is not the
assignment of credit between petitioner and its assignor,
but the knowledge or consent of the creditor's assignee to
the debtor-mortgagor's sale of the property to another.
When the credit was assigned to petitioner, only
notice to but not the consent of the debtor-mortgagor was
necessary to bind the latter. Applying Article 1627 of the
Civil Code,
the assignment made to petitioner includes the accessory
rights such as the mortgage. Article 2141, on the other
hand, states that the provisions concerning a contract of
pledge shall be applicable to a chattel mortgage, such as
the one at bar, insofar as there is no con ict with Act No.
1508, the Chattel Mortgage Law. As provided in Article
2096 in relation to Article 2141 of the Civil Code, 4 a thing
pledged may be alienated by the pledgor or owner "with
the consent of the pledgee." This provision is in
accordance with Act No. 1508 which provides that "a
mortgagor of personal property shall not sell or pledge
such property, or any part thereof, mortgaged by him
without the consent of the mortgagee in writing on the
back of the mortgage and on the margin of the record
thereof in the o ce where such mortgage is recorded." 5
Although this provision in the chattel mortgage has been
expressly repealed by Article 367 of the Revised Penal
Code, yet under Article 319(2) of the same Code, the sale
of the thing mortgaged may be made provided that the
mortgagee gives his consent and that the same is
recorded. 6 In any case, applying by analogy Article 2128
of the Civil Code 7 to a chattel mortgage, it appears that a
mortgage credit may be alienated or assigned to a third
person. Since the assignee of the credit steps into the
shoes of the creditor-mortgagee to whom the chattel was
mortgaged, it follows that the assignee's consent is
necessary in order to bind him of the alienation of the
mortgaged thing by the debtor-mortgagor. This is
tantamount to a novation. As the new assignee,
petitioner's consent is necessary before respondent
spouses' alienation of the vehicle can be considered as
binding against third persons. Petitioner is considered a
third person with respect to the sale with mortgage
between respondent spouses and third party defendant
Conrado Tecson.
In this case, however, since the alienation by the
respondent spouses of the vehicle occurred prior to the
assignment of credit to petitioner, it follows that the former
were not bound to obtain the consent of the latter as it was
not yet an assignee of the credit at the time of the
alienation of the mortgaged vehicle.
The next question is whether respondent spouses
needed to notify or secure the consent of petitioner's
predecessor to the alienation of the vehicle. The sale with
assumption of mortgage made by respondent spouses is
tantamount to a substitution of debtors. In such case,
mere notice to the creditor is not enough, his consent is
always necessary as provided in Article 1293 of the Civil
Code. 8 Without such consent by the creditor, the
alienation made by respondent spouses is not binding on
the former. On the other hand, Articles 1625, 9 1626 10 and
1627 of the Civil Code on assignment of credits do not
require the debtor's consent for the validity thereof and so
as to render him liable to the assignee. The law speaks
not of consent but of notice to the debtor, the purpose of
which is to inform the latter that from the date of
assignment he should make payment to the assignee and
not to the original creditor. Notice is thus for the protection
of the assignee because before said date, payment to the
original creditor is valid.
When Tecson Enterprises assigned the promissory
note and the chattel mortgage to Filinvest, it was made
with respondent spouses' tacit approval. When Filinvest in
turn, as assignee, assigned it further to petitioner, the
latter should have noti ed the respondent spouses of the
assignment in order to bind them. This, they failed to do.
The testimony of petitioner's witness that notice of
assignment was sent to respondent spouses was stricken
off the record. Having asserted the a rmative on the issue
of notice, petitioner should have substantiated its
allegations in order to obtain a favorable judgment. In civil
cases, the burden is on the party who would be defeated
if no evidence is given on either side. 11 Being the plaintiff
in the trial below, petitioner must establish its case, relying
on the strength of its own evidence and not upon the
weakness of that of its opponent. 12 The consent to the
assignment given by respondent spouses to Filinvest
cannot be construed as the spouses' knowledge of the
assignment to petitioner precisely because at the time of
the assignment to the latter, the spouses had earlier sold
the vehicle to another. LLpr
One thing, however, that militates against the posture of
respondent spouses is that although they are not bound
to obtain the consent of the petitioner before alienating the
property, they should have obtained the consent of
Filinvest since they were already aware of the assignment
to the latter. So that, insofar as Filinvest is concerned, the
debtor is still respondent spouses because of the absence
of its consent to the sale. Worse, Filinvest was not even
noti ed of such sale. Having subsequently stepped into the
shoes of Filinvest, petitioner acquired the same rights as
the former had against respondent spouses. The
defenses that could have been invoked by Filinvest
against the spouses can be successfully raised by
petitioner. Therefore, for failure of respondent spouses to
obtain the consent of Filinvest thereto, the sale of the
vehicle to Conrado R. Tecson was not binding on the
former. When the credit was assigned by Filinvest to
petitioner, respondent spouses stood on record as the
debtor-mortgagor.
WHEREFORE, the decision of the Court of Appeals
is REVERSED and SET ASIDE. The decision of the
Regional Trial Court is AFFIRMED and REINSTATED.
Respondents Jesus Ponce and Elizabeth Ponce are
ORDERED to pay petitioner, jointly and severally, the
following sums:
2. P26,633,09, plus interest at 14%
per annum from April 26, 1978 until fully paid;
3. 25% of the above sum in item (a) as
liquidated damages;
4. P5,000.00 as attorney's fees; and
5. costs of suit.
In connection with the Third Party Complaint of the
respondents, the third party defendant Conrado Tecson is
hereby ordered to reimburse respondents Ponce for all
the sums the latter would pay to petitioner, and attorney's
fees of P3,000.00.
SO ORDERED. prcd
Davide, Jr., C.J., Puno, Kapunan and Pardo, JJ.,
concur. FIRST DIVISION

[G.R. No. 78519. September 26, 1989.]

VICTORIA YAU CHU, assisted by

her husband MICHAEL CHU,
petitioners, vs. HON. COURT OF
APPEALS, FAMILY SAVINGS BANK
and/or CAMS TRADING
ENTERPRISES, INC., respondents.

Francisco A. Lara, Jr. for petitioner.

D.T. Ramos and Associates for respondent
Family Savings Bank.
Romulo T. Santos for respondent CAMS Trading.

DECISION

GRIÑO-AQUINO, J : p

This is a petition for review on certiorari to annul and

set aside the Court of Appeals' decision dated October
28, 1986 in CA-G.R. CV No. 03269 which affirmed the
decision of the trial court in favor of the private
respondents in an action to recover the petitioners'
time deposits in the respondent Family Savings Bank.
Since 1980, the petitioner, Victoria Yau Chu, had been
purchasing cement on credit from CAMS Trading
Enterprises, Inc. (hereafter "Cams Trading" for
brevity). To guaranty payment for her cement
withdrawals, she executed in favor of Cams Trading
deeds of assignment of her time deposits in the total
sum of P320,000 in the Family Savings Bank
(hereafter the Bank). Except for the serial numbers
and the dates of the time deposit certificates, the
deeds of assignment, which were prepared by her own
lawyer, uniformly provided —
". . . That this assignment serves as a
collateral or guarantee for the payment of
my obligation with the said CAMS
TRADING ENTERPRISES, INC. on
account of my cement withdrawal from
said company, per separate contract
executed between us."
On July 24, 1980, Cams Trading notified the Bank that
Mrs. Chu had an unpaid account with it in the sum of
P314,639.75. It asked that it be allowed to encash the
time deposit certificates which had been assigned to it by
Mrs. Chu. It submitted to the Bank a letter dated July 18,
1980 of Mrs. Chu admitting that her outstanding account
with Cams Trading was P404,500. After verbally advising
Mrs. Chu of the assignee's request to encash her time
deposit certificates and obtaining her verbal conformity
thereto, the Bank agreed to encash the certificates. It
delivered to Cams Trading the sum of P283,737.75 only,
as one time deposit certificate (No. 0048120954) lacked
the proper signatures. Upon being informed of the
encashment, Mrs. Chu demanded from the Bank and
Cams Trading that her time deposit be restored. When
neither complied, she filed a complaint to recover the
sum of P283,737.75 from them. The case was docketed
in the Regional Trial Court of Makati, Metro Manila (then
CFI of Rizal, Pasig Branch XIX), as Civil Case No.
38861. LLphil
In a decision dated December 12, 1983, the trial court
dismissed the complaint for lack of merit.
Chu appealed to the Court of Appeals (CA-
G.R. CV No. 03269) which affirmed the
dismissal of her complaint.
In this petition for review, she alleges that the Court of
Appeals erred:
1. In not annulling the encashment of her
time deposit certificates as a pactum
commissorium; and
2. In not finding that the obligations secured by her
time deposits had already been
paid.
We find no merit in the petition for review.
The Court of Appeals found that the deeds of
assignment were contracts of pledge, but, as the
collateral was also money or an exchange of "peso for
peso," the provision in Article 2112 of the Civil Code for
the sale of the thing pledged at public auction to convert
it into money to satisfy the pledgor's obligation, did not
have to be followed. All that had to be done to convert
the pledgor's time deposit certificates into cash was to
present them to the bank for encashment after due
notice to the debtor.
The encashment of the deposit certificates was not a
pacto commissorio which is prohibited under Art. 2088 of
 the Civil Code. A pacto commissorio is a provision for
the automatic appropriation of the pledged or mortgaged
property by the creditor in payment of the loan upon its
maturity. The prohibition against a pacto commissorio is
intended to protect the obligor, pledgor, or mortgagor
against being overreached by his creditor who holds a
pledge or mortgage over property whose value is much
more than the debt. Where, as in this case, the security
for the debt is also money deposited in a bank, the
amount of which is even less than the debt, it was not
illegal for the creditor to encash the time deposit
certificates to pay the debtors' overdue obligation, with
the latter's consent.LexLib
Whether the debt had already been paid as now alleged
by the debtor, is a factual question which the Court of
Appeals found not to have been proven for the evidence
which the debtor sought to present on appeal, were
receipts for payments made prior to July 18, 1980 .
Since the petitioner signed on July 18, 1980 a letter
admitting her indebtedness to be in the sum of
P404,500, and there is no proof of payment made by her
thereafter to reduce or extinguish her debt, the
application of her time deposits, which she had assigned
to the creditor to secure the payment of her debt, was
proper. The Court of Appeals did not commit a reversible
error in holding that it was so.
WHEREFORE, the petition for review is denied. Costs
against the appellant.
SO ORDERED.
Narvasa, Cruz and Medialdea, JJ., concur.
Gancayco, J., I inhibit.
FIRST DIVISION
[G.R. No. 158755. June 18, 2012.]
SPOUSES FRANCISCO and MERCED
RABAT , petitioners,
vs.
PHILIPPINE NATIONAL BANK, respondent.
DECISION
BERSAMIN, J : p
The inadequacy of the bid price in an extrajudicial
foreclosure sale of mortgaged properties will not per se
invalidate the sale. Additionally, the foreclosing
mortgagee is not precluded from recovering the de ciency
should the proceeds of the sale be insu cient to cover the
entire debt.
Antecedents
The parties are before the Court a second time to
thresh out an issue relating to the foreclosure sale of the
petitioners' mortgaged properties. The rst time was in
G.R. No. 134406 entitled Philippine National Bank v.
Spouses Francisco and Merced Rabat, decided on
November 15, 2000. 1 In G.R. No. 134406, the Court
observed that —
The RABATs did not appeal from the
decision of the trial court. As a matter of fact,
in their Appellee's Brief led with the Court of
 Appeals they prayed that said decision be a
rmed in toto. As against the RABATs the trial
court's ndings of fact and conclusion are
already settled and nal. More speci cally,
they are deemed to have unquali edly
agreed with the trial court that the
foreclosure proceedings were valid in all
respects, except as to the bid price. 2
Accordingly, we extract the antecedent facts from
the narrative of the decision in G.R. No. 134406, as
follows:HICEca
On 25 August 1979, respondent
spouses Francisco and Merced Rabat
(hereafter RABATs) applied for a loan with
PNB. Subsequently, the RABATs were
granted on 14 January 1980 a medium-term
loan of P4.0 Million to mature three years
from the date of implementation.
On 28 January 1980, the RABATs
signed a Credit Agreement and executed a
Real Estate Mortgage over twelve (12)
parcels of land which stipulated that the loan
would be subject to interest at the rate of
17% per annum, plus the appropriate service
charge and penalty charge of 3% per annum
on any amount remaining unpaid or not
renewed when due.
On 25 September 1980, the RABATs executed
another document denominated as "Amendment to
the Credit Agreement" purposely to increase the
interest rate from 17% to 21% per annum, inclusive of
service charge and a penalty charge of 3% per annum
to be imposed on any amount remaining unpaid or not
renewed when due. They also executed another Real
Estate Mortgage over nine (9) parcels of land as
additional security for their medium -term loan of Four
Million (P4.0 M). These parcels of land are agricultural,
commercial and residential lots situated in Mati, Davao
Oriental.
The several availments of the loan
accommodation on various dates by the
RABATs reached the aggregate amount of
THREE MILLION FIVE HUNDRED
SEVENTEEN THOUSAND THREE HUNDRED
EIGHTY (P3,517,380), as evidenced by the
several promissory notes, all of which were due
on 14 March 1983.
The RABATs failed to pay their outstanding
balance on due date.
In its letter of 24 July 1986, in
response to the letter of the RABATs of 16
June 1986 requesting for more time within
which to arrive at a viable proposal for the
settlement of their account, PNB informed
the RABATs that their request has been
denied and gave the RABATs until 30 August
1986 to settle their account. The PNB sent
the letter to 197 Wilson Street, San Juan,
Metro Manila.
For failure of the RABATs to pay their
obligation, the PNB led a petition for the
extrajudicial foreclosure of the real estate
mortgage executed by the RABATs. After
due notice and publication, the mortgaged
parcels of land were sold at a public auction
held on 20 February 1987 and 14 April 1987.
The PNB was the lone and highest bidder
with a bid of P3,874,800.00. IcTEaC
As the proceeds of the public auction
were not enough to satisfy the entire
obligation of the RABATs, the PNB sent
anew demand letters. The letter dated 15
November 1990 was sent to the RABATs at
197 Wilson Street, San Juan, Metro Manila;
while another dated 30 August 1991 was
sent to the RABATs at 197 Wilson Street,
Greenhills, San Juan, Metro Manila, and also
in Mati, Davao Oriental.
Upon failure of the RABATs to comply
with the demand to settle their remaining
outstanding obligation which then stood at
P14,745,398.25, including interest, penalties
and other charges, PNB eventually led on 5
May 1992 a complaint for a sum of money
before the Regional Trial Court of Manila.
The case was docketed as Civil Case No.
92-61122, which was assigned to Branch 14
thereof.
The RABATs led their answer with
counterclaim on 28 July 1992 to which PNB
led its Reply and Answer to Counterclaim. On
2 January 1993, the RABATs led an
amended answer. The RABATs admitted
their loan availments from PNB and their
default in the payment thereof. However, they
assailed the validity of the
auction sales for want of notice to them before and
after the foreclosure sales.
They further added that as residents
of Mati, Davao Oriental since 1970 up to the
present, they never received any notice nor
heard about the foreclosure proceeding in
spite of the claim of PNB that the foreclosure
proceeding had been duly published in the
San Pedro Times, which is not a newspaper
of general circulation.
The RABATs likewise averred that
the bid price was grossly inadequate and
unconscionable.
Lastly, the RABATs attacked the
validity of the accumulated interest and
penalty charges because since their
properties were sold in 1987, and yet PNB
waited until 1992 before ling the case.
Consequently, the RABATs contended that
they should not be made to suffer for the
interest and penalty charges from May 1987
up to the present. Otherwise, PNB would be
allowed to pro t from its questionable
scheme.
The PNB led on 5 February 1993 its Reply to the
Amended Answer and Answer to Counterclaim. 3 EaICAD
On June 14, 1994, the Regional Trial Court,
Branch 14, in Manila (RTC) rendered its decision in Civil
Case No. 92-61122, 4 disposing thus:
WHEREFORE, and in view of the
foregoing considerations, judgment is
hereby rendered dismissing the complaint.
On the counterclaim, the two (2)
auction sales of the mortgaged properties
are hereby set aside and ordering the plaintiff
to reconvey to the defendants the remaining
 properties after the sale [of] su cient
properties for the satisfaction of the
obligation of the defendants.
The parties will bear their respective cost.
So ordered.
Only PNB appealed to the CA (CA-G.R. CV No.
49800), assigning the following two errors to the RTC, 5
to wit:
I Juan. This was the very reason why
WHETHER OR NOT THE TRIAL COURT
ERRED IN NULLIFYING THE SHERIFF'S
AUCTION SALE ON THE GROUND THAT THE
PNB'S WINNING BID IS VERY LOW.
II
WHETHER OR NOT THE TRIAL COURT
ERRED IN RULING THAT THE DEFENDANTS-
APPELLEES ARE NOT LIABLE TO PAY
INTEREST AND PENALTY CHARGES AFTER
THE AUCTION SALES UP TO THE FILING OF
THIS CASE.
On their part, the Spouses Rabat simply urged in
their appellee's brief that the decision of the RTC be
entirely affirmed. 6
On June 29, 1998, the CA upheld the RTC's
decision to nullify the foreclosure sales but rested its ruling
upon a different ground, 7 in that the Spouses Rabat could
not have known of the foreclosure sales because they had
not actually received personal notices about the
foreclosure proceedings. The CA concluded: ICHDca
An examination of the exhibits show
that the defendant-appellees given address
is Mati, Davao Oriental and not 197 Wilson
Street, Greenhills, San Juan, Metro Manila
as alleged by the plaintiff-appellant (Exhibit
C to J, pp. 208, 217, 220, 229, 236-239,
Records). Records further show that all
subsequent communications by plaintiff-
appellant was sent to defendant-appellees
address at Wilson Street, Greenhills, San
defendant-appellees were not aware of the
foreclosure proceedings.
As correctly found out by the trial
court, there is a need for the setting aside of
the two (2) auction sales hence, there is yet
no de ciency judgment to speak of.
WHEREFORE, the decision of the
trial court dated 14 June 1994, is hereby
affirmed in toto.
SO ORDERED. ITADaE
PNB appealed in due course (G.R. No. 134406), 8
positing:
WHETHER OR NOT THE COURT OF
APPEALS MAY REVIEW AND PASS UPON
THE TRIAL COURT'S FINDING AND
CONCLUSION ON AN ISSUE WHICH WAS
NEVER RAISED ON APPEAL, AND,
THEREFORE, HAD ATTAINED FINALITY.
1. THE COURT OF APPEALS HAS SO
FAR DEPARTED FROM THE
ACCEPTED AND USUAL COURSE
 OF JUDICIAL PROCEEDINGS Philippine National Bank in its Appellant's
WHEN IT DECIDED AND Brief.
RESOLVED A QUESTION OR
No pronouncement as to costs.
ISSUE NOT RAISED IN
PETITIONER PNB'S APPEAL; SO ORDERED. 10
2. THE COURT OF APPEALS To conform to the decision in G.R. No. 134406, the
COMMITTED GRAVE ABUSE OF CA amended its decision on January 24, 2003 by
DISCRETION WHEN IT REVERSED resolving the errors speci cally assigned by PNB in its
THE FINDING AND CONCLUSION OF appellant's brief. 11 The CA nonetheless a rmed the RTC's
THE TRIAL COURT ON AN ISSUE decision, declaring that the bid price had been very low
WHICH HAD ALREADY ATTAINED and observing that the mortgaged properties might have
FINALITY. been sold for a higher value had PNB first conducted a
PNB argued that it had not raised the issue of lack reappraisal of the properties. CaAcSE

of notice about the foreclosure sales because the fact that
the Spouses Rabat had not appealed the RTC's ruling as
regards the lack of notice but had in fact prayed for the a
rmance of the RTC's judgment had rendered nal the
RTC's rejection of their allegation of lack of personal
notice; and that, consequently, the CA had committed
grave abuse of discretion in still resolving the issue of lack
of notice despite its not having been raised during the
appeal. 9
On November 15, 2000, the Court promulgated its
decision in G.R. No. 134406, decreeing:
WHEREFORE, the petition is
GRANTED. The decision of the Court of
Appeals of 29 July 1998 in CA-G.R. CV No.
49800 is hereby SET ASIDE. The Court of
Appeals is directed to DECIDE, with
reasonable dispatch, CA-G.R. CV No. 49800
on the basis of the errors raised by petitioner
Upon PNB's motion for reconsideration, however,
the CA promulgated its questioned second amended
decision on March 26, 2003, 12 holding and ruling as
follows:
After a thorough and conscientious
review of the records and relevant laws and
jurisprudence, We find the motion for
reconsideration to be meritorious.
While indeed no evidence was
presented by appellant as to whether a
reappraisal of the mortgaged properties was
conducted by it before submitting the bid
price of P3,874,800.00 at the auction sale,
said amount approximates the loan value
under its original appraisal in 1980, which
was P4 million.
There is no dispute that mere inadequacy of
price per se will not set aside a judicial sale of
real property. Nevertheless, where the
inadequacy of the price is purely shocking to
the conscience such that the mind revolts at it
and such that a reasonable man would neither
directly nor indirectly be likely to consent to it,
the sale shall be declared null and void. Said
rule, however, does not strictly apply in the
case of extrajudicial foreclosure sales so that
when a supposed "unconscionably low price"
paid by the bank-mortgagee for the
mortgaged properties at the public auction
sale is assailed, the sale is not thereby
readily set aside on account of such low
purchase price. It is well-settled that alleged
gross inadequacy of price is not material
"when the law gives the owner the right to
redeem as when a sale is made at a public
auction, upon the theory that the lesser the
price the easier it is for the owner to effect
the redemption." In fact, the property may be
sold for less than its fair market value.
Here, it may be that after the lapse of
seven (7) years, the mortgaged properties may
have indeed appreciated in value but under the
general rule cited above which had been
consistently applied to extrajudicial foreclosure
sales. We are not inclined to invalidate the
auction sale of appellees' mortgaged
properties solely on the alleged gross
inadequacy of purchase price of
P3,874,800.00 which is actually almost the
equivalent of the loan value of appellees'
twenty-one (21) parcels of land under the
"Real Estate Mortgage" executed in favor of
appellant PNB in 1980. It has been held that
no such disadvantage is suffered by the
mortgagor as he stands to gain with a reduced
price because he possesses the right of
redemption. Thus, the re-appraisal of the
mortgaged properties resulting in the appellant
PNB's bid price of approximately the original
loan value of their mortgaged properties is
bene cial rather than harmful considering the
right of redemption granted to appellees under
the law. The claim of nancial hardship or
losses in their business is not an excuse for
appellees-mortgagors to evade their clear
obligation to the bank-mortgagee. SCaITA
Further, the fact that the mortgaged
property is sold at an amount less than its
actual market value should not militate
against the right of appellant PNB to the
recovery of the de ciency in the loan
obligation of appellees. Our Supreme Court
had ruled in several cases that in
extrajudicial foreclosure of mortgage, where
the proceeds of the sale are insu cient to pay
the debt, the mortgagee has the right to
recover the de ciency from the debtor. A
claim of de ciency arising from the
extrajudicial foreclosure sale is allowed. As
to appellees' claim of allegedly excessive
penalty interest charges, the same is without
merit. We note that the promissory notes
expressly provide for a penalty charge of 3%
per annum to be imposed on any unpaid
amount on due date.
WHEREFORE, premises considered,
the present motion for reconsideration is
hereby GRANTED. Consequently, Our
Amended Decision of January 24, 2003 is
 hereby SET ASIDE and a new one is hereby
entered GRANTING the appeal of plaintiff
PNB. The decision appealed from in Civil Case
No. 92-61122 is hereby REVERSED and SET
ASIDE. Judgment is hereby rendered ordering
the appellees to pay, jointly and severally, to
appellant PNB: (1) the amount of
P14,745,398.25 plus accrued interest, service
charge and penalty charge of 3% per annum
from February 29, 1992 until the same shall
have been fully paid; (2) Ten Percent (10%) of
the total amount due as attorney's fees; and (3)
the costs of suit.
No pronouncement as to costs. AEaSTC
SO ORDERED. 13
The Spouses Rabat thereafter moved for the
reconsideration of the second amended decision, but the
CA denied their motion. 14
Hence, this appeal by the Spouses Rabat.
Issues
The Spouses Rabat frame the following issues for
this appeal, thuswise:
WHETHER OR NOT THE COURT OF
APPEALS ERRED IN UPHOLDING THE
VALIDITY OF THE SUBJECT AUCTION
SALES AND ADJUDGING PAYMENT OF
DEFICIENCY SUM, INTERESTS, PENALTY
AND SERVICE CHARGES AND
ATTORNEY'S FEES, IN COMPLETE AND
ABSOLUTE DISREGARD OF ITS EARLIER
PRONOUNCEMENTS, THE ARGUMENTS
OF HEREIN PETITIONERS AND EVIDENCE
BORNE IN THE RECORDS OF THE
INSTANT CASE.
WHETHER OR NOT THE COURT OF
APPEALS ERRED IN DEPARTING FROM ITS
FINDING OF FACTS AND CONCLUSIONS OF
LAW AS STATED IN THE EARLIER
RENDERED FIRST AMENDED DECISION
DATED 24 JANUARY 2003. 15
The Spouses Rabat insist that the CA's reversal of
the amended decision was unjusti ed. They pray that the
amended decision of the CA (which a rmed the RTC's
judgment) be reinstated. They contend that PNB was not
entitled to recover any de ciency due to the invalidity of
the forced sales. 16
In its comment, 17 PNB counters that the petition for
review does not raise a valid question of law; and that the
CA's second amended decision was regularly
promulgated because the CA thereby acted well within its
right to correct itself considering that the amended
decision did not yet attain finality under the pertinent rules
and jurisprudence.
Accordingly, the Court must pass upon and resolve
three distinct issues. The rst is whether the inadequacy of
the bid price of PNB invalidated the forced sale of the
properties. The second is whether PNB was entitled to
recover any de ciency from the Spouses Rabat. The third
is whether the CA validly rendered its second amended
decision.
Ruling
The appeal has no merit. aHIDAE
 Anent the rst issue, we rule against the Spouses
Rabat. We have consistently held that the inadequacy of
the bid price at a forced sale, unlike that in an ordinary
sale, is immaterial and does not nullify the sale; in fact, in
a forced sale, a low price is considered more bene cial to
the mortgage debtor because it makes redemption of the
property easier. 18
In Bank of the Philippine Islands, etc. v. Reyes, 19
the Court discoursed on the effect of the inadequacy of
the price in a forced sale, stating:
Throughout a long line of
jurisprudence, we have declared that unlike
in an ordinary sale, inadequacy of the price
at a forced sale is immaterial and does not
nullify a sale since, in a forced sale, a low
price is more bene cial to the mortgage
debtor for it makes redemption of the
property easier.
In the early case of The National Loan
and Investment Board v. Meneses, we also
had the occasion to state that:
As to the inadequacy of the price of the sale, this
court has repeatedly held that the fact that a property
is sold at public auction for a price lower than its
alleged value, is not of itself su cient to annul said
sale, where there has been strict compliance with
all the requisites marked out by law to obtain the
highest possible price, and where there is no
showing that a better price is obtainable.
(Government of the Philippines vs. De Asis, G.R. No.
45483, April 12, 1939;
Guerrero vs. Guerrero, 57 Phil., 442;
La Urbana vs. Belando, 54 Phil., 930;
Bank of the Philippine Islands v.
Green, 52 Phil., 491.) (Emphases
supplied.)
In Hulst v. PR Builders, Inc., we further
elaborated on this principle: DcTaEH
[G]ross inadequacy of price
does not nullify an execution sale. In
an ordinary sale, for reason of equity,
a transaction may be invalidated on
the ground of inadequacy of price, or
when such inadequacy shocks one's
conscience as to justify the courts to
interfere; such does not follow when
the law gives the owner the right to
redeem as when a sale is made at
public auction, upon the theory that
the lesser the price, the easier it is for
the owner to effect redemption. When
there is a right to redeem,
inadequacy of price should not be
material because the judgment
debtor may re-acquire the property
or else sell his right to redeem and
thus recover any loss he claims to
have suffered by reason of the
price obtained at the execution
sale. Thus, respondent stood to
gain rather than be harmed by the
low sale value of the auctioned
properties because it possesses
the right of redemption. . . .
(Emphasis supplied.)
 It bears also to stress that the mode of
forced sale utilized by petitioner was an
extrajudicial foreclosure of real estate
mortgage which is governed by Act No. 3135,
as amended. An examination of the said law
reveals nothing to the effect that there should
be a minimum bid price or that the winning bid
should be equal to the appraised value of the
foreclosed property or to the amount owed by
the mortgage debtor. What is clearly provided,
however, is that a mortgage debtor is given the
opportunity to redeem the foreclosed property
"within the term of one year from and after the
date of sale." In the case at bar, other than the
mere inadequacy of the bid price at the
foreclosure sale, respondent did not allege any
irregularity in the foreclosure proceedings nor
did she prove that a better price could be had
for her property under the circumstances.
At any rate, we consider it notable enough that
PNB's bid price of P3,874,800.00 might not even be said
to be outrageously low as to be shocking to the
conscience. As the CA cogently noted in the second
amended decision, 20 that bid price was almost equal to
both the P4,000,000.00 applied for by the Spouses Rabat
as loan, and to the total sum of P3,517,380.00 of their
actual availment from PNB.
Resolving the second issue, we rule that PNB had
the legal right to recover the deficiency amount. In
Philippine National Bank v. Court of Appeals, 21 we held
that:
. . . it is settled that if the proceeds of
the sale are insu cient to cover the debt in an
extrajudicial foreclosure of the mortgage, the
mortgagee is entitled to claim the de ciency
from the debtor. For when the legislature
intends to deny the right of a creditor to sue for
any de ciency resulting from foreclosure of
security given to guarantee an obligation it
expressly provides as in the case of pledges
[Civil Code, Art. 2115] and in chattel
mortgages of a thing sold on installment basis
[Civil Code, Art. 1484(3)]. Act No. 3135, which
governs the extrajudicial foreclosure of
mortgages, while silent as to the mortgagee's
right to recover, does not, on the other hand,
prohibit recovery of de ciency. Accordingly, it
has been held that a de ciency claim arising
from the extrajudicial foreclosure is allowed.
22
Indeed, as we indicated in Prudential Bank v.
Martinez, 23 the fact that the mortgaged property was
sold at an amount less than its actual market value
should not militate against the right to such recovery.
24
There should be no question that PNB was legally
entitled to recover the penalty charge of 3% per annum
and attorney's fees equivalent to 10% of the total amount
due. The documents relating to the loan and the real
estate mortgage showed that the Spouses Rabat had
expressly conformed to such additional liabilities; hence,
they could not now insist otherwise. To be sure, the law
authorizes the contracting parties to make any stipulations
in their covenants provided the stipulations are not
contrary to law, morals, good customs, public order or
public policy. 25 Equally axiomatic are that a contract is the
law between the contracting parties, and that they have
the autonomy to include therein such stipulations, mere technicality to be easily brushed aside, but a matter
clauses, terms and conditions as they may want to of public policy as well as a time-honored principle of
include. 26 Inasmuch as the Spouses Rabat did not procedural law.
challenge the legitimacy and e cacy of the additional
It is no different herein. The amended decision that
liabilities being charged by PNB, they could not now bar
favored the Spouses Rabat would have attained nality
PNB from recovering the de ciency representing the
only after the lapse of 15 days from notice thereof to the
additional pecuniary liabilities that the proceeds of the
parties without a motion for reconsideration being timely
forced sales did not cover. SACHcD

led or an appeal being seasonably taken. 32 Had that

Lastly, we uphold the CA's promulgation of the
second amended decision. Verily, all courts of law have
the unquestioned power to alter, modify, or set aside their
decisions before they become final and unalterable. 27 A
judgment that has attained nality becomes immutable and
unalterable, and may thereafter no longer be modified in
any respect even if the modi cation is meant to correct
erroneous conclusions of fact or law and whether it will be
made by the court that rendered it or by the highest court
of the land. 28 The reason for the rule of immutability is
that if, on the application of one party, the court could
change its judgment to the prejudice of the other, the court
happened, the amended decision might have become nal
and immutable. However, considering that PNB timely led
its motion for reconsideration vis-Ã -vis the amended
decision, the CA's reversal of the amended decision and
its promulgation of the second amended decision were
valid and proper.
WHEREFORE, we AFFIRM the SECOND
AMENDED DECISION promulgated on March 26, 2003 in
CA-G.R. CV No. 49800 entitled Philippine National Bank
v. Spouses Francisco and Merced Rabat.
The petitioners shall pay the costs of suit. cTaDHS

could thereafter, on application of the latter, again change

the judgment and continue this practice inde nitely. 29 The SO ORDERED.
equity of a particular case must yield to the overmastering
need of certainty and unalterability of judicial Leonardo-de Castro, Peralta, * Del Castillo and
pronouncements. 30 The doctrine of immutability and Perlas-Bernabe, JJ., concur.
inalterability of a nal judgment has a two-fold purpose,
namely: (a) to avoid delay in the administration of justice
and, thus, procedurally, to make orderly the discharge of
judicial business; and (b) to put an end to judicial
controversies, at the risk of occasional errors, which is
precisely why courts exist. Indeed, controversies cannot
drag on inde nitely; the rights and obligations of every
litigant must not hang in suspense for an inde nite period
of time. 31 As such, the doctrine of immutability is not a